Every few years a major investment scandal comes along. We hear famous named celebrities lost money. Being rich does not necessarily mean you are smart. As a money manager magazine ad once said: “Making money and managing money are two different skills.” Why do some celebrities make bad investment decisions? How does this help you persuade clients to take advice?
1. They assume the good times will last forever. This can often happen with people in professional sports. They assume their careers will last forever. They might think product sponsorship deals will come their way after they stop playing.
Good advisors: They remind clients they need to put money aside in the good times because the future is unpredictable. Caesar might have had a triumphal parade, but he had a guy whispering in his ear, “All glory is fleeting.”
2. They get bad advice from the wrong people. You often hear stories about the business managers of celebrities who were unqualified for the job, had conflicts of interest or simply made bad decisions. The celebrity delegates decision making to someone else. It might be a childhood friend.
Good advisors: Many firms have specialists in areas like working with sports figures or lottery winners.
3. They do not take advice. They might not pay attention to their investments. The person advising them might not be able to reach them. They think they are smarter than their advisor.
Good advisors: They realize busy people need professional money management. Let someone else make the daily buy and sell decisions. Professional money management is often a good fit. The advisor schedules periodic meetings far in advance.
4. They do not diversify. They invest in a few stocks or industries, hoping to win big. They do not understand it is better to get a conservative return over a long period of time through liquid securities than going for the big score.
Good advisors: They try to get investors to focus on the building blocks of a portfolio, even if they sound boring to the client.
5. They do not understand risk. They back a friend’s venture into the restaurant business, unaware 30% of restaurants fail in the first year. (1) Only one in five Broadway shows might recoup their costs. (2) They invest in unproven ideas, hoping to make a big score.