My Top Investment Tip
Posted by Todd Smith
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Little Things Matter was created to teach you all “the little things” that I believe are necessary for achieving personal and professional success. One of the keys to enjoying personal success is to be smart with how you invest your money.
Over the last couple of years I have seen far too many people I know personally lose ALL of their money. In some cases, their net worth was in the millions and they lost everything- even their marriages.
One of the best ways to learn how to be successful is to observe the behavior of others. There is a lot to be gained by analyzing both their good and bad examples. When it comes to investments, I have learned a lot more by watching people make bad decisions than good decisions.
Most of the people I am referring to are in their 40’s and 50’s. Typically, they saved money for years through modest investment strategies and then got too aggressive.
Warren Buffet’s number 1 investment advice: don’t lose money. His number 2 tip is: read number one. While this sounds simple and may be great advice, none of the people who lost everything planned to do so. In fact, if you were to ask them what they thought their odds were of losing everything, they would have said ZERO.
Most of the people I have described lost their money in Florida residential real estate investments. Their rational for their investment seemed reasonable. Never in recorded history has Florida’s home values declined. Given this statistic you can see why so many people had confidence in buying Florida real estate.
As a result of the numerous poor investment decisions I’ve made over the years combined with observing the bad investment decisions of others, there is one rule that I will NEVER break as long as I live. I will NEVER invest more than 10% of my net worth in any one investment, except for my primary residence.
By capping any one investment at 10% of your net worth, the most you can lose is10% if something terrible happens to that investment. That will be a bad day, but not as bad as it would be if you lost 100%.
My belief in limiting any one investment at 10% is so strong that I have asked my estate-planning attorney to add a clause to my trust documents. It provides that in the event of my death, at no time can more than 10% of the assets be invested in any one investment. This is my way of making sure my wife and/or children don’t make this serious mistake.
I realize this topic is a sensitive one and different from all the other little things I have shared with you so far. But if this little thing keeps you from losing a large chunk of your hard earned money, this may turn out to be the most important lesson of all.
One of the best investment decisions you can ever make is to say NO!
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