With the right systems and strategies in place, it’s mind-blowing how your money can grow for you, especially over the long term.
For example, if you invest $200 each month for 40 years, you will have put in a total of $96,000. If your money grows at 10% per year, your money will grow to over $1,275,000! The vast majority, over a million dollars, is your money growing for you.
But that also means that even small money leaks can have devastating consequences.
When I work with financial coaching clients, I can typically spot 2-5% in money leaks in their portfolios right away, sometimes even more.
So let’s see what just a 2% money leak can do…
If your money should have been earning 10%, but only earned 8%, your money would have grown to almost $703,000.
A small 2% money leak would mean $572,000 LESS.
And if you want to start living off your investments at that point, the 2% money leak means that your money will be generating about $4700 per month instead of about $10,600 per month… nearly $6,000 per month less!
Here are the three biggest money leaks that I see in most portfolios…
Money Leak #1: Over-Diversification
You’ve probably heard that diversification is important, but you can over-do it, which slows the growth of your money so much that it’s hard to reach your financial goals.
For example, many models have a certain percentage of your portfolio allocated to assets that are massively underperforming.
I recently had a session with a new VIP financial coaching client who was very happy with the financial planner she had been working with for years. Once she understood the positions and the investment strategy that he had recommended for her, she exclaimed, “Why would he do this to me?!”
The strategy that he was using was reasonable and similar to what most Big Box advisors use, but the portfolio was over-diversified, which meant that my client had less money to work with when she needed it most.
Money Leak #2: Market Crash Exposure
You’ve also probably heard that the market is volatile, but over time, it tends to go up.
Because of that, many Big Box advisors advocate a long-term “buy and hold,” strategy. What I love most about this strategy is that you can put it on autopilot and statistically, you’ll do a LOT better than if you were actively trading.
The downside is that you expose yourself to big market crashes and corrections, which can cut your portfolio in half and take five or more years to recover. That can give you financial PTSD!
The pre-supposition is that you never know when a crash or correction is coming, but actually there are MANY signals that are easy to spot, if you know how.
Money Leak #3: Not Investing
This is the biggest potential money leak of all!
Even if your portfolio is over-diversified and fully exposed to market crashes, in the long term, you’re still WAY ahead of the game compared to someone who is not investing at all.
I’ve worked with many clients who are so worried about losing money that they keep most or all of their money in cash.
The American Association of Actuaries & Pension Planners did a detailed piece of research on retirement success and found that the #1 driver of success wasn’t asset quality, diversification or expense ratios. It was SAVINGS RATE.
What they found was that 74% of the cause of someone winning with money was that they built the habit of investing money consistently over a long period of time.
We can spend a ton of time analyzing the minutiae, but the big thing is to start investing and keep investing month-after-month.
The habit of managing your money is more important than the amount so I encourage you to start investing more now, even if it’s just a few dollars… it can make a big difference!
Penelope Jane Smith is the premier financial freedom coach for women entrepreneurs and the go-to expert for some of the biggest names in the conscious business industry. More about Penelope.
Thanks for bringing awareness to things I haven’t thought about! Nancy
Whatever area in your life that you want to change the biggest change is to get Started!
Oops, guilty of all three! It is crazy that I spent a fair amount of money to get an ‘expert’ opinion just to learn years later I was over-diversified at high expense ratios, then I kept a lot of money out of the market due to all the fear of market crashes. Thanks for your teachings!