What are The 3 Shiny Objects to Avoid in Wealth Building?

I guess I really want to talk to some degree about the shiny objects that many of us face when we’re building wealth. 

I want to really shine a light on them, just in case there are any of you out there today that have maybe been putting your attention or building wealth with these three filters but haven’t realised it, and perhaps have time to rectify the decisions that you’ve been making so that you can course correct.

#1 Focusing Only on Building Your Net Worth 

I think the first thing I want to focus on is that focus on only building your net worth; what that looks like, and I’ll talk about a couple, Frank and Janie.

We’re under the impression that if they focused on accumulating properties, and did it in a way that meant they had to swallow the pain of negative cash flow for years and years and years, they hoped they were going to end up with a portfolio that was going to have significantly better growth.

In fact, what’s happened is they’ve been successful in growing their net worth, but the financial pain of carrying that property portfolio has been substantial, and they’re in a situation now, where they feel completely worn out.

They’ve definitely tuned into the emotional marketing that goes on, which says that buying a particular style of property in a good growth area was what was going to help them achieve their goals. 

Buying assets to drive up your net worth certainly does make sense and is the greatest power or greatest tool that you can use if you are starting your wealth investment journey. 

But continuing to buy investments for the entire course of your investing journey that are massively negatively cash flowing doesn’t actually necessarily get you where you want to go any faster, because the challenge with holding an investment property that is negatively cash flowing is that you have to wait a long time for that asset to generate enough income for you to actually successfully live off it.

I’ve spoken to so many investors in the last few weeks who have an enviable portfolio of great properties in highly sought after areas.

But they are not feeling the joy of having a high net worth. They don’t feel rich and they don’t feel wealthy. 

In fact, the experience they have is really just continuing to redline and, to some degree, living hand to mouth existence.

They are a great example of people who have, by somebody’s playbook, done the right things and now find themselves in a situation where they’re worth a lot of money on paper, but really they’re just so far away from where they want to be.

If you’re in that situation or if you find yourself in that situation, it’s really time to take stock and really evaluate what got you from where you were when you began to where you are is not what’s going to get you to that next stage of the journey.

#2 Abdicating Your Decision Making

The second kind of shiny object that I want to really focus on today is this abdicating of decision making.

The example that comes to mind is a client that I’ve known for many years, Stan, who was an avid share trader, and unfortunately found himself in a position of wiping out 30% of his net worth during the global financial crisis at a time in his life, when he should have been really meandering into some kind of retirement. 

He found himself in a situation where he felt his only option was to start taking on some higher-risk investments to make up for the losses and to claw back some of the capital that he had lost. 

So he did all sorts of things. He put $400,000 into a restaurant, thinking that that would really help him make back the money very quickly. 

I should add that Stan was not a business owner, and was going to be a silent partner in that business.

Needless to say, that full $400,000 was lost. The second thing he tried to do was implore his financial planner to shift his share portfolio into much more speculative, high-risk investments, and the other thing he did was find some kind of obscure investments in things like some trees.

I don’t know, for those of you who aren’t aware, that there were a number of investment opportunities available over the last 20 years where people could actually invest in the farming of large trees. Obviously, a long gameplay. But essentially, the idea is that they would pay off big time. 

I guess the unfortunate part for Stan is that he just found himself trying to continuously make up for lost time and money by taking on higher and higher risk investments and ultimately reached a point where he had to decide whether or not he could just continue doing what he was doing or look for a different pathway.

Now, fortunately for Stan, he had a relatively high net worth and so, yes, his net worth was substantially lost, but he still had enough to tinker and play and get him to a position where he could actually do something meaningful in the final years towards his retirement.

The contrast to that is someone called Jim, who got a huge payout when he sold his business, and Jim is a guy who likes to keep things simple.

He doesn’t regard himself as highly educated but recognises that when you don’t know what you don’t know, you’ve got to go out and get help.

So he went around to some of the investment banks and some of the big four and tried to find out what they could help him do with the windfall from the sale of the business.

He couldn’t actually understand what the plans were, which I think is, unfortunately, the way that a lot of the wealth industry has gone is by making things seem super complicated or challenging that it makes it or gives the perception of higher value.

But for Jim, he looked at those fancy spreadsheets and jargon and just couldn’t understand it, and so he decided to go it alone.

I guess that’s the contrast to the investor, who abdicates decision-making and then finds themselves in a situation like Stan’s, which is, after 25 to 30 years of running his business, finding that the team of professionals to whom he had entrusted his wealth to just had really botched it badly.

#3 Focusing on the Wrong Investment Properties

The third shiny object that I think a lot of business owners find themselves stuck in when it comes to wealth building, and which I definitely think is about leaning your ladder on the wrong wall is focusing on the wrong kinds of investment properties and investments. 

One of the things that I’ve talked about, particularly when I’m working with younger people, and they’re just desperately trying to understand, “Well, where should I begin in terms of my investment journey?”

Obviously, you never want to stretch beyond an investment that you’re comfortably able to afford.

But outside of that, what I tried to say to people is that if you think of the price of real estate that you’re looking at, as sitting somewhere on a bell curve, like where it goes up, and then it goes down.

So down one end of the bell curve, you have the super cheap properties in the super dodgy areas where maybe you’re going to attract a more problematic tenant.

And which are definitely going to have the highest probability of being worth a lot of money, but unfortunately, don’t necessarily give you a lot of income.

In fact, they drain you of income, and also, they are in times of volatility much more volatile in terms of price.

So if you think of all property as sitting on a bell curve, one of the things that I’ve seen a lot of investors do is, for various reasons, invest at either end of the bell curve.

 They’re either very keen on buying cheap properties, and I jokingly say they’re happy to be a slumlord.

 At the other end of the spectrum, you’ve got the people who only want ultra ultra-blue chip, and partly that’s because there’s a perception of it being the best or safer or whatever perception they have.

 I’ve seen a number of investors over time who have invested at either end of that bell curve get themselves into hot water.

 Certainly, at the slumlord end of things, you face things like, as I said, problematic tenants, and in the event that something goes wrong and you need to sell, sometimes they can be less sought after or less desirable.

 A really good example of investors who have, and I say, slumlords, with a bit of tongue in cheek, I certainly don’t mean it literally, but investors who have been very attracted to various government schemes where there has been a rental subsidy paid.

 Things like the NDIS here in Australia has been an example of that, where the government has paid significant rental subsidies and made it a very attractive thing for investors to acquire real estate that they know they’re renting below market value, but where the government subsidy more than accommodates that.

 I know investors who’ve purchased, say, for example, 10 of those, and they’re living on a fairly healthy six-figure net income, and then suddenly, the rug has been pulled out from under them, when the banks have turned around and said, “Well, actually, you need to start making principal repayments on your loans.”

 And suddenly that net income has been massively eroded by the fact that the cash flow just isn’t there anymore.

 Other investors who participate in similar rental subsidy schemes that then find that governments change and rental subsidies run out and find themselves holding a lesser quality of real estate, where they’re not necessarily that excited about the capital growth, if at all, and they’re not necessarily wanting to deal with the turnover of tenants or the problematic tenants that can sometimes be attracted to those cheaper rental areas.

 The other end where I talked about blue-chip, I’ve got clients who’ve definitely invested in blue chip, and they’ve made significant capital gains on those properties.

 So not arguing against that, but they’ve been crippled by the cash flow and the land tax.

 I had a really good friend who used to acquire properties in the eastern suburbs of Sydney, houses typically.

 It was a very active strategy, but she would work on renovating and then flipping those properties.

 For many years, she had a very lucrative annual income and avoided a lot of capital gains, taxes and things like that.

 But when there was a blip in the market, or recycle, as many people know it, where the market stagnates or goes sideways, she found that she got her fingers burnt a couple of times, and it really affected her confidence.

Are You Leaning Your Ladder on The Wall?

So I guess in the context of, “Are you leaning your ladder on the wrong wall,” it’s definitely my personal view that if you’re dealing at either end of the bell curve, regardless of whether you believe those strategies work or don’t work, I look at it from the viewpoint of “If things go wrong, number one, do I have a ready pool of good tenants who will rent this from me? And number two, in the event that I have to sell in a hurry or for any reason, do I have a large ready pool of people who will want to buy that?”

 That is why typically, or historically, I have tended to buy properties that are close to the middle of that bell curve, because, in my mind, it’s giving you the highest probability of success, because there’s a large pool of ready investors.

 If the super-wealthy hit the skids, then they have to drop back to this area of the market.

 In the event that people at the lower end want to step up, there’s going to be the largest pool of people with whom to transact, both from a tenancy and sales perspective.

 I definitely see that as an area where people sometimes go a little bit wrong.

Final Thoughts

So look, intellectually, understanding that building wealth is important is definitely the right starting point.

 But you need to have a clear plan that makes sense to you. Building wealth is not rocket science.

 People have heard me say that over and over, like a broken record.

 But the question I want to leave with you today is, do you, in fact, understand the wealth strategy that you are adopting? Does it actually make sense to you? And will it get you where you want to be in the timeframe that you want?

 If the answer to all of those questions is yes, then keep on doing what you’re doing?

 If you can answer ‘yes’ to all of those questions, it means that you are doing the right things and moving in the right direction.

But the metaphor of, “Are you climbing the ladder to success, but leaning it on the wrong wall?, unfortunately, is a metaphor which comes up in conversation with people who really feel that they’ve just wasted time focusing on the wrong aspects of wealth, maybe abdicating their decisions, maybe buying the wrong kinds of investments, and they’ve ended up it ended up in a situation where they’ve really really, put themselves into a corner where they just can’t afford to make any more mistakes.

 When we’re young, we have time on our side. We can afford to trip, we can even afford to fall. But you know, as we get closer to that point in time where we need to get off the treadmill, we need our wealth to actually support us instead of us supporting it. Then that is when these questions become super relevant, guys.

 I hope this was really helpful till next time. Take care and please, as always, reach out to me on any of my socials or on email if there are conversations or comments or topics that you’re interested in. Take care.

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