Winning through defense
Posted on October 31, 2016 by bob in MoneyWise
Though I was never especially good at it, I used to play a little tennis. One of the most valuable things that I learned, and that any tennis player should understand, is that more points are lost than won. In other words, more points are decided when a player makes a mistake than when the other player makes an unreturnable brilliant shot.
The same point is valid in much of financial management: Success is not so much dependent on the awesome decisions that one makes as it is by the avoidance of bone-headed choices, especially when the impact is large. The goal should be to try to avoid costly mistakes, especially big ones. Where do people make big mistakes? Here are a few examples.
One of the biggest outlays most people make is for housing. In addition, homes are illiquid—it can take a long time to sell one. If you pay too much for a house, buy one in a location that turns out to be unsatisfactory, or buy knowing that you will be moving before long, you are taking a bigger risk that you will not get out of the house what you put into it. And the potential loss is proportional to the cost of the house. Vehicles are the second most expensive outlay for many people, so the same thing holds true here, though to a lesser degree.
Insurance is a great invention. It only came into being in the last couple of centuries, but it can help us manage lots of risk. I know of more than one situation where someone overlooked a premium due date on a house or car, had a major incident, and regrettably found themselves without coverage. Accidentally letting needed coverage drop is a mistake that can cost thousands of dollars.
A third way to lose a fair amount of money is to take investment risk that you do not understand, for instance, in your retirement account. To avoid painful losses, you need to understand how different types of assets perform under various circumstances. Learn from experience with lesser amounts before making larger commitments. It may also be imprudent to buy a financial product (including certain annuity and insurance policies) that you do not comprehend. Frankly, some are so complex that an advanced degree seems necessary to figure them out.
A fourth bad idea is to cosign on a loan made to another person “to help them out.” The other person could be a child, grandchild, sibling or friend. The cosigner is obligated to repay the loan if the primary borrower does not, even though the cosigner did not benefit from the purchase. If the person wanting to make the purchase cannot qualify for the loan, it would be better to think of another way to assist than by committing to repay what they borrow. More than one relationship was destroyed by cosigning, not to mention the financial havoc it can produce.
In short, any decision that involves a sizable amount of money or the risk of material loss requires more than normal consideration, study, data gathering, and perhaps reliance on professional assistance. In financial decision making you are competing against other players in the market place. The likelihood of consistently serving aces or making other splendid shots is remote. A better strategy for success is suggested by the observation of Harry Callahan that, “A man’s got to know his limitations.” If you know that you cannot always be brilliant, focus on avoiding errors, especially when the risks and potential costs are high.
Alan Wallace
Alan Wallace, CFA, ChFC, CLU, is a Senior Private Wealth Advisor for Ronald Blue & Co.’s Montgomery office, www.ronblue.com/location-al. He can be reached at 334-270-5960, or by e-mail at alan.wallace@ronblue.com.
(4954450-09-16)
