Six ways to lose a fortune

If you get good at making money and become well-off, try to avoid these six dangers -- or risk losing your wealth!

People come by wealth in many different ways. Some inherit it; others become successful entrepreneurs. And a few win it, usually via the National Lottery or Premium Bonds.

In the boom years of 1995 to 2007, buy-to-let property investing created more than a few millionaires. Personally, my preferred route to riches is via long-term investing in companies.

Unfortunately, there are two big problems with becoming comfortably well-off or even seriously wealthy. The first is building the wealth in the first place; the second is hanging onto it!

Hold on tight to what you’ve got

One thing that’s very clear is that it’s much cheaper and easier to learn from other people’s experiences, rather than making our own blunders. Indeed, one of the world’s richest people, investment guru Warren Buffett, urges us to “...learn from other people's mistakes as much as possible.”

So, if you want to stay well-heeled, then try to avoid these six snags:

1) Taking on too much debt

The one thing that destroys more companies and capitalists than anything else is excessive borrowing. Of course, during the go-go years of cheap, easily accessible credit, it’s a cinch to make bumper returns. However, when times turn tough, high levels of borrowing can be a death blow to over-leveraged individuals and businesses.

Another of Warren Buffett’s most famous remarks is, “Only when the tide goes out do you discover who's been swimming naked.” In other words, only when the economy turns and easy credit becomes tough debt do we separate the real players from the chancers. Excessive debt is often the difference between these two groups.

• ·         Adopt our goal: Destroy your debt

2) Following the hot money

History seems to be one long cycle of booms followed by busts. Over time, even the greatest empires collapse and fail. Similar patterns are seen in financial markets, although most of us spot these bubbles only after they have burst.

In the past decade alone, we’ve seen some dramatic booms and busts: in the dotcom world; domestic and foreign property; the stock market halving, doubling and then halving again; and so on. What’s more, the seeds of the next busts are already being sown -- perhaps in bonds or gold?

The most important lesson to learn from these cycles is that picking the wrong investment can wipe out a large proportion of your wealth. This is easily done by following the latest fad; as I say “Only nerds follow the herd.” Indeed, being a contrarian -- ignoring perceived wisdom and taking the opposite view -- often pays off handsomely.

In short, rather than blindly following the latest fad, make sure that your wealth is properly diversified. In other words, don’t put too many eggs into a single basket. By spreading your capital between different asset classes (such as bonds, cash, property and shares) and avoiding bandwagons, you won’t lose your shirt in the next crash.

3) Taking too much risk

When you’re young and don’t have so much to lose, it’s wise to take risks in order to turn income into capital over the long term. Indeed, as the Russian proverb states, “He who takes no risks drinks no Champagne.”

However, as you get older and have less time to recover from life’s inevitable setbacks, take your foot off the accelerator and cruise towards a comfortable retirement. In other words, once your wealth is building nicely and you’re getting rich slowly, there’s no need to take all-or-nothing bets.

This means avoiding certain temptations, particularly greed, which lures you in with rich promises while blinding you to the downsides. Another hazard to avoid is gambling, because the odds are always staked in the house’s favour. For example, the Lotto pays out only half (50%) of the stake money collected, which makes it a truly terrible bet.

• ·         Adopt our goal: Get ready to retire

4) Backing the wrong business

One of the most tried-and-tested ways to build personal wealth is to start your own company. If your business is successful and you own the majority of its equity (shares), then you will reap rich rewards.

Then again, setting up and running a business is far from plain sailing. Even entrepreneurs who have a good idea and work incredibly hard sometimes fail. According to the Insolvency Service, 19,077 businesses in England & Wales went into liquidation in 2009. Indeed, most small businesses cease trading within four years of starting out.

So, be aware that backing your business (or someone else’s) with your personal wealth and assets is a double-edged sword. If the venture succeeds, then you’ll reap the lion’s share of the profits. However, if the firm suffers a setback (perhaps due to cash-flow, borrowing or tax problems), then you could end up losing everything. If the business has a charge over your family home, then you could even lose the roof over your head.

5) Not being a wiser miser

A few years ago, Lloyds TSB conducted a remarkable survey of its millionaire customers. What Lloyds found was quite profound: despite being worth £1 million+, the vast majority of these well-heeled individuals shopped around very carefully before making all but the most trivial purchases.

In fact, bargaining and haggling was very much a part of life for these ‘wiser misers’. Having made their pot, they were in no mood to lazily hand it over to another individual or organisation. What they wanted was a bargain, so they refused point-blank to pay the ‘ticket price’ for any major items.

The clear lesson here is: always shop around before handing over your hard-earned cash. Otherwise, your spending could rise even faster than your wealth, leaving you worse off in the long run. To manage and preserve your wealth, keep a close eye on your outgoings, put aside time for money management, and always plan ahead.

6) Falling for scams

Once, I asked my wife what my career would have been had I not fallen into the world of financial services and journalism. Instantly, she replied, “A financial fraudster!”

In all seriousness, no matter how wealthy you are, I’d strongly advise you to be careful whom you trust. Even at the best of times, handing over your money to someone else can be fraught with problems. In the worst-case scenario, that ‘once-in-a-lifetime opportunity’ could turn out to be an outright fraud.

Just because you’re smart and rich doesn’t mean that you’re not at risk of being swindled by experienced criminals who play on greed and fear. Indeed, even the most experienced, well-educated punters are at risk of being conned, as I warned in The top ten scariest scams. Therefore, learn to recognise the hallmarks of scams, swindles and frauds before you get fleeced!

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