Home' Trinidad and Tobago Guardian : August 17th 2014 Contents SBG20 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt AUGUST 17 • 2014
The rich and famous are not par-
ticularly known for their finan-
cial smarts (they people for that,
after all). They may have a
knack for raking it in, but that
doesn t necessarily translate to
holding onto that money, or investing it for the
future. For every financially savvy celebrity
coupon clipper, like Kristen Bell, there s a Nicolas
Cage (had to pay the IRS US$6 million in back
taxes in 2012) or Toni Braxton (filed for bank-
ruptcy twice) or Teri Polo of "Meet the Parents"
fame (filed for bankruptcy this year): celebrities
and other rich folks who, through overspending,
overconfidence and general short-sightedness,
manage to bungle their finances and squander
For the rest of us, some of the best financial
lessons can be learned from watching the for-
tunate foul up.
After all, it isn t as if money flows into our
bank accounts with an instruction manual on
how to make it last. Whether they ve earned
their millions over the course of a lifetime or
walked out of a 7-Eleven with a winning lottery
ticket, the rich can fall into just as many bad
money management traps as us mortals.
"There s a pervasive attitude (among high
earners) that financial planning doesn t apply
to them because they either make so much or
have so much," says Dan McElwee, a certified
financial planner with Ventura Wealth Man-
agement in Ewing, New Jersey. "But in reality,
their financial concerns are pretty universal."
Here s where the wealthy slip up---and what
we can learn from their mistakes:
They mistake career success for
Career and financial success can lead people
to think a little too highly of their financial
"They re telling people what to do all day
and they think that translates over into the
investing world," says Peter Mallouk, an inde-
pendent financial adviser from Kansas City,
Kansas, and author of "The 5 Mistakes Every
Investor Makes and How to Avoid Them."
A behavioral finance expert might call this
evidence of "overconfidence," the type of mind-
set that can lead investors to ignore financial
guidance because they think they ve got the
magic touch and are smarter than everyone
In "On Financial Frauds and Their Causes:
Investor Overconfidence," a study by Monmouth
University economist Steven Pressman,
researchers found victims of financial fraud
were often led astray by their own egos. They
also attributed overconfidence to the reason
why men tend to perform worse than women
in long-term investing.
"Because women are less likely to indulge in
excessive trading, they outperform men," Press-
man writes. "Investors who use traditional bro-
kers, remaining in touch with them by telephone,
achieve better results than online traders, who
damage their performance by trading more
actively and speculatively."
They lose perception of what income
Most often this affects people who unex-
pectedly come into money---whether it s an
inheritance from a generous relative s estate or
a surprise bonus at work. Things like estate
taxes, income tax and long-term earning poten-
tial haven t crossed their minds. As far as they re
concerned, they re rich.
"If a woman inherits US$5 million, she has
no perception of what US$5 million is so she
starts giving it away to friends and family willy
nilly before she s ever figured out the true value
of that money," McElwee says. "She has to
figure out how to make it long-term income
They retire and spend like there's no
A million bucks isn t what it used to be, but
it can be hard to tell that to a wealthy retiree
who s determined to take advantage of a care-
fully-built nest egg.
"We see a lot of high-income earners who
retire and are quick to go buy a big beach house,
a condo in the city --- the kinds of assets that
can t be turned into cash," McElwee says. "They
can become more of a burden than anything
They don't know when to quit
High earners aren t all trust fund babies. The
vast majority have spent much of their years
working to earn what they ve got. Because of
this, they tend to fear retirement in a way that
many others may not.
Ventura once had to reassure a client---an
executive earning seven figures who had US$5
million saved for retirement---that she was ade-
quately prepared to leave the workforce.
"People who are making a tonne of money
haven t mentally prepared (for retirement)," he
says. "They ve worked so hard for so long, the
idea that they re going to take their life s work
and (quit) is a very high-stress situation."
One of the exercises he gives his clients to
complete before retirement is to practice saying
out loud what they plan to do in the first three,
six and 12 months after they stop working.
"These are thoughts a highly compensated
person isn t think about," he says. "They re not
thinking about what am I going to do when
this ends? "
They're too afraid of what they
Behavioral finance experts have long explored
the link between loss aversion---a fear of losing
despite what we might gain by taking a risk---
In the same way that high earners can be
overconfident in their financial skills, they can
also let their own fears drive them away from
potentially lucrative investing choices.
"It can really cause paralysis," Mallouk says.
"If the stock market goes down, people go to
bonds. If it goes up, they get back in. People
think they re protecting their wealth, but they
really get in the way of themselves."
In the years since the 2008 recession, for
example, investors have recouped their losses,
with average 401(k) balances nearly double since
the market lows of 2009. And the investors
who fled the market during the financial crisis
have missed out on the last few years of growth.
They can't imagine being unhealthy
If you ask a millionaire whether he or she
has disability insurance through their employer,
chances are they wouldn t know the answer,
says McElwee. Ditto long-term care insurance.
"It s incredibly important to understand how
your income would be replaced if you were to
become disabled before retirement," he says.
"If you earn US$500,000 and now all of a sud-
den you re supposed to live off of (a disability
check), we have a problem."
Long-term care insurance is another often
neglected safety net among wealthy workers.
Without LTCI, the typical nursing home stay
can cost tens of thousands of dollars per year.
"Right now we re watching sizable estates
with millions of dollars completely disappear
as the owner is sitting in a nursing home paying
US$10,000 to US$15,000 a month for their
care," Ventura says.
They pick the wrong kind of adviser
Investment adviser fees can wreck anyone s
portfolio, and wealthy workers often wind up
putting their money into very expensive hands.
In a paper by Portfolio Solutions and Betterment,
"The Case For Index Fund Portfolios,"
researchers looked at investment portfolios
from 1997 to 2012. They found passively man-
aged index fund portfolios outperformed com-
parable actively managed portfolios more than
80 per cent of the time.
A big factor contributing to that difference
is adviser fees, which often eat away at high
returns achieved with actively managed funds.
"You need an independent adviser who s a
fiduciary," someone acting in your best interests,
"Or else all you re doing is paying somebody
else to make the same mistakes you could make
on your behalf, who, 90 per cent of the time,
has a conflict of interest."
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