When Confucius noted that “life is really simple, but we insist on making it complicated,” he should have included an addendum that the same thing goes for finances. Believe it or not, a simple plan throughout the course of your financial life could be the key to sanity, even as your wealth grows.
Obviously, people want to be good stewards of what they have. And most of us aren’t Warren Buffett, nor do we desire to accumulate as much wealth as we possibly can before we die. We want our money to work for us and to serve as a tool for us to be able to live our best and most comfortable lives. While that varies on a case-by-case basis, the fact remains that the more assets you accumulate, the more tempting it can be for you to get into complicated investment vehicles that can end up being far more trouble than they are worth.
Putting your finances into seemingly more sophisticated products, such as hedge funds, investment properties or a business, can seem like the logical next step. After all, one’s finances and investments are paramount to chitter chatter, whether we are gathered around the water cooler or on the back nine at the country club. But before investing outside the plain vanilla or the norm, it’s still important to consider every angle. It's also important to consider what kind of experience the investment will provide for you and whether it will enhance your life or detract from it.
People sometimes come into significant amounts of money unexpectedly or by surprise. Consider someone who has started and run a successful business. They then end up selling it for far more money than they ever pictured, or that they even need for that matter. When it’s time to discuss the next step with an adviser, I have a word to the wise. If the adviser recommends the addition of more complicated things to the financial picture, bear this in mind: The more ensnared the investor is, the more the adviser thinks their services will be retained and needed.
Wealth Can Breed Unnecessary Complications
Similarly, there is this unsubstantiated perception among some investors that significant finances call for complicated actions. But a lot of these actions can come with a separate tax structure, or they are attached to a partnership, unforeseen details that need to be factored in.
And sometimes, there are investments in things such as commercial properties or side businesses that seem easy to get into and end up being impossible to navigate. I’ve seen firsthand how wrong these endeavors can go. A commercial property that was supposed to bring in money each month can become a money pit that the investor has to supplement if a tenant moves out. Or, that property can also drain the finances if capital or tenant improvements need to be made.
What Happens When You Keep It SimpleOn the flip side, I met a gentleman years ago who sold his business and put 100% of the proceeds into an S&P 500 index fund through Vanguard. He admitted that he turned a few heads, because the school of thought was that he should be getting into something more complicated like a hedge fund. He told me, “I find firsthand that the perfect thing for me is pretty simple.”
But this gentleman also felt little to no pain attached to his investments. Since it’s difficult to outperform the broad stock market regardless of structure, he continued to perform well, and tax time was nice and simple. He didn’t have to wait for months to have all of his reports come in. He was able to enjoy his life and not worry about when the next capital call was going to come in from one of the investments.
Carefully Consider the Time FactorAnother issue with complicated investing strategies is that some opportunities and products come with long time commitments, locking in your money for years. They aren’t something you can decide to get into one year and out of the next. Keep in mind that there could be changes in your life that will require you to see about getting out of them, and you could end up stuck, unable to withdraw your funds due to restrictions for an extended period of time.
For example, I recall dealing with a client a few years ago who had a large chunk of her money tied up in a nursing home. She wanted to sell her position, so she could buy a second home near her grandkids, but she had several other partners in this nursing home. None of her partners would purchase her share, and she couldn’t find anyone to buy her out.
Finally, if you are considering these out-of-the norm products, make sure the amount you are investing is meaningful. Just last week, I was talking with someone who was dealing with some issues related to a $10,000 investment in a real estate investment trust. I remember thinking it wasn’t worth it, given all the hassles and restrictions. It’s important to make an investment that is at least large enough to have a meaningful impact.
The Bottom Line
When you speak with your adviser, remember that ultimately your money is yours to make decisions with. Obviously, it seems more financially glamorous to name drop that you are invested in a commercial property or hedge fund. This sounds slicker than saying you are taking on less complication by investing in an S&P 500 product. But remember this: You might find yourself in need of the money faster than it is made available by your product, or the property might not end up paying out like you had hoped. And nobody — from the water cooler to the back nine — wants to find themselves unable to access their funds or paying more than they want for their investment. That is something we can all take straight to the bank.
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Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa works with small business owners and entrepreneurs to assist them with financial management and creating organized systems and procedures. She specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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