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The Biggest Financial Mistake The Mass Affluent Make

Updated: Dec 8, 2023

Mass affluent investors - individuals with $100,000 to $1,000,000 of liquid financial assets plus an annual household income over $75,000 - make a series of common financial missteps when it comes to building wealth, and these mistakes have been prevalent for more than half a century. Alarmingly, these mistakes are still happening today despite the wealth of information and financial literacy resources that are readily available. Many mass affluent investors continually miscalculate risk and make investment decisions based on misinformation.

One of the most widespread errors is the miscalculation of financial risk due to not understanding the real investment risks. This applies to both making and not making investments. It typically results from a lack of understanding or a disregard for the potential pitfalls and opportunities that come with different financial investments.

As an overly simplified example, an investor might sell their investments in their 401(k) or refrain from adding to them because they are concerned about the market. In this example, the long-term risk is likely much lower than what they are calculating. How much is it really going to go down in the short term? Maybe 30%, 40%, or even 50%, but it's unlikely to go down by 80%, 90%, or 100%. Yet the same investor may invest in real estate rentals, thinking that real estate always goes up, which based on history, is likely correct. However, the problem is that the rental investment is likely leveraged and has cash flow risks that they typically do not evaluate or account for. And because the real estate is leveraged, they can lose 80%, 90%, or even 100%.

Equally concerning is the misinformation in the financial world. Misinformation has unfortunately become commonplace, even in an era where we are increasingly connected and information-oriented. This misinformation may be subtle and unintentional, resulting from misunderstandings, or it may be a more calculated attempt to deceive investors. Either way, falling into these misinformation traps can lead to significant financial losses or potential gains if individuals fail to seek correct information and advice.

Wealth creation isn't simply a matter of IQ; it has more to do with the temperament of the individual. The capacity to manage emotions, maintain discipline, and make rational decisions even during periods of financial uncertainty plays a pivotal role in building wealth. Since temperament seems to be more of a natural trait than a learned one, an investor that does not have it naturally needs to have an investment policy in place and somebody to provide unbiased advice and a disciplined process. That someone might be an advisor, spouse, mentor, etc…and it should be someone the investors trusts and listens to in times of uncertainty.

In summary, the miscalculation of risk and misinformation are common missteps that can be mitigated with a solid understanding of potential financial pitfalls. A thorough comprehension of financial literacy is crucial for informed decision-making and accurate risk assessment. The importance of a strategic financial roadmap cannot be overstated; it guides financial decisions and helps individuals navigate the financial maze of potential financial mistakes and pitfalls. Above all it's important to have a process that will help maintain discipline and make rational decisions that will create wealth.

DISCLOSURE - All written content on this article is for information purposes only. We utilized ChatGPT and other sources for this article. Opinions expressed herein are solely those of Core Wealth Consultants. Material presented is believed to be from reliable sources, however, we make no representations as to its accuracy or completeness. Core Wealth Consultants, LLC a Registered Investment Advisor in the States of Florida, Indiana and Michigan. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Diversification and asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss.

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