By Thomas Schulte | Director of Financial Planning
We all love it when things are going well in our financial world. Our portfolio is up, our income is growing, and the business is doing well.
While that’s never bad news, optimism often comes with a dangerous case of tunnel vision. As Morgan Housel reminds us, much of what we think is skill, is also a heavy dose of luck and good conditions. In layman’s terms, people get greedier when things are going well.
So, while we always hope the wind is at your back, here are three reminders to keep you sober in the midst of success.
Margin For Error = Wealth Preservation
What creates wealth (concentrated investment) is a poor way to preserve it. Everyone has a different tipping point, but it’s essential to identify when wealth preservation shifts from concentrated re-investing to thoughtful diversification. Like all things compounding, you reach a critical mass where wealth creation requires less risk-taking.
Don’t Assume Favorable Conditions
Every financial advisor remembers their first market crash. It’s a hard reset on your expectations of the future. A season of success has a way of helping us forget that favorable conditions aren’t a fixed factor. A few examples:
- Business owners who want to exit during financial downturns
- High earners who receive a bad medical diagnosis in their peak earning years
- Divorce. Attorney’s fees. Splitting your net worth.
The list goes on, and we shouldn’t live in fear of every possible disaster, but we need to keep an eye on how our bullish assumptions can create blind spots.
Diversification Isn’t Sacrificing Growth
There’s a saying I like: the danger of 10 spins in a row landing on black isn’t that the next one could land on red–it’s that you forget there are other ways to make money than roulette.
It’s hard to stop riding a hot streak. It’s hard to not reinvest in the business as aggressively. It’s hard to sell company stock that’s growing like crazy. That said, diversification is still a growth strategy. It’s a conscious trade: you won’t make a “killing” in exchange for not getting financially killed. Growth is still the game, and we’re less prone to greed when we remember that.
