persistently Planned investment best based on available resources
…greed is not good, not even in wealth accumulation…
Understanding that greed isn’t just a state of gorging all the food on the menu/ buffet, is a step toward understanding how to minimise your risk of befalling its damaging consequences financially. Planned investment (investing to a strategy) is best based on available, accessible, financial resources. And doing so at levels that meet the needs, goals and objectives, appropriately defined.
Greed as an investor is exercised when you persistently seek to take part in every opportunity (‘next big thing’). Often the greedy ‘investor’ does so without understanding the ultimate financial costs of being involved. It is a practice where investment risk aversion is ignored. The greedy investor is often blinded to apparent risk by the anticipation of realising the promised gains). This Greed is Not Good!
Whether considering investment opportunities or making lifestyle decisions, committing beyond one’s means can have life-changing (shattering) consequences. Spending more than you earn, particularly over a long-term, usually results in unpleasant outcomes.
Planned investment, within means, brings peace of mind
Wealth management strategies that utilise financing arrangements to minimise the cost of the excess spending (making them tax deductible perhaps) should be based on structures that are understood by the investor. They should also contemplate an investment portfolio that is diversified, having appropriate income and capital characteristics that react predictably to changing economic circumstances. To the extent that the structure employed utilises gearing products to fund investment, a risk-tolerant level of gearing should be treated as a debt ceiling.
If borrowing to invest, ensure that the asset being acquired has the strong potential to grow over a relevant timeframe. Preferably this growth should be at a rate that exceeds the cost of the interest on the funds borrowed! Importantly, ensure that the servicing cost of the debt can be comfortably paid from income generated by the investment. Any need to support debt servicing from reserve funds should be kept to a minimum. This will be particularly important if there is any pause in the ongoing income from the investment asset.
Protected, planned investment will be more sustainable
Income Protection and other personal life insurances that will support you in the event of illness, accident or trauma is critical. This protection during periods of exposure to debt whilst holding these assets should be addressed/ reviewed regularly. Part of the review process needs to be mindful of changes to your health status.
Personal budgeting helps to set the parameters around what you can afford by way of debt-servicing commitment. Unfortunately it is probably the least undertaken task of all in this context. A well-considered financial plan will provide you with the road map to attainment of the ultimate financial goals of life: goals such as –
- home purchase;
- raising a family (with all the associated costs: health, education, activities, care);
- major holidays;
- accumulating assets (lifestyle/ investment);
- estate planning; and, ultimately
- a financially-independent retirement.
The advisers at Continuum Financial Planners Pty Ltd are able to assist with the development of appropriate tools and strategies; and to help monitor that the budgets and plans made, are stuck to for the long term: contact us for an obligation-free meeting to discuss your situation: alternatively, call our office (on 07-3421 3456) and arrange a meeting with one of our experienced financial planners.
[Originally published in our eNewsletter on 14 July 2010 under the title ‘Greed Isn’t Good…’; the article has been revised and refreshed from time to time, most recently, in July 2024]
