What do Kim Kardashian, Donald Trump and you have in common financially? Let’s connect the dots.
Kardashian gets robbed in Paris at gunpoint of jewelry worth $10 million-plus. A couple of things are disturbing about that sentence. First, being robbed at gunpoint must be completely terrifying. Second, having $10 million of jewelry must be equally so. The first needs no explanation, but I think we should dig a little deeper into the second.
Protecting your jewelry often needs a separate schedule on your property/casualty coverage. The amount of insurance coverage and cost necessary to fully protect the value of the Kardashian-West jewelry would be astronomical — and I suspect not completely scheduled. This raises a key point with property casualty insurance — you should make sure that you are covered for the expensive things that can go wrong in your life. Manage your cost of insurance through higher deductibles since you can most likely absorb small losses. The first thing you can learn from the Kimye scenario is to review your insurance, take pictures of the items you are insuring, make sure you are covered for their actual replacement costs (if they have risen or dropped in value) and manage the smaller costs (minor collisions, damages, or losses) by self-insuring through using a higher deductible.
But the second example is a bit more subtle. Even if you could afford tens of millions of dollars of jewelry, would it make you happy? Everyone enjoys some special items. If you eat a wonderful piece of chocolate cake, the first bite is delightful. Each subsequent bite becomes less enjoyable until (maybe after a whole cake) you eventually reach a point where you never want to see another chocolate cake. Maybe the next day you forget your lesson and overindulge again, but eventually, the lack of self-control will diminish your chocolate cake experience. It is the same with overspending. If you carefully lay out your purchase decisions, you may enjoy them more, and that enjoyment will last much longer.
Donald Trump suffers an almost billion-dollar one-year tax loss and Rudy Giuliani appears on talk shows and lauds him as a genius and a fiduciary. There is no question about whether Trump is entitled to shelter future income by using these losses. Whether he should take the losses or not is a red herring. Legally, everybody is allowed to take those losses. The point I want to focus on is whether someone who loses a billion dollars is a genius and a fiduciary.
Trump’s utilization of his losses has nothing to do with brains and everything to do with risk-taking. Let’s reserve the genius moniker for people like the recent Nobel Prize winners. Trump took on almost incalculable risks, was savvy enough to get banks to lend so much money to him that when things went awry they were forced to work with him rather than to remove him, and was also lucky enough to have family members who could lend him even more money to ride things out until markets turned around. But he bet the farm and lost. The fact that he eventually won is irrelevant. He couldn’t have predicted a rebound with any more assurance than he could have foreseen the depth of his collapse. He is much more willing to accept risk than most of us would be — but risk always cuts two ways. The point is that after the fact, we sometimes confuse our ability to make money with genius.
If you want to increase your own odds of successful outcomes from your financial planning, then don’t do what Trump did — borrowing more than you can afford and investing most of your money in only one type of investment. People can accumulate great wealth with this strategy — many entrepreneurs who turned small businesses into large ones did this — but they are not the norm. More importantly, we don’t hear enough of the stories of those who failed epically. Even if you have a pretty big backstop behind you, you are far better off with a systematic approach of investing regularly and diversifying to avoid trumped up volatility.
It is not clear to me whether Trump should have even been considered a fiduciary, or, if he was, whether he acted like one. By definition, a fiduciary is someone who is supposed to put others’ interests ahead of his or her own and handle investor money with prudence. Someone can lose some of your money and still be a fiduciary since investments are not guaranteed. In order to act as a fiduciary one must be serving someone else — one is not a fiduciary of his or her own account.
When you are looking for your own adviser, ask candidates whether they are fiduciaries and how that is demonstrated through their services. Investments should not just be suitable; they should be aligned with your timeline, objectives and strategy. This puts your interests first.
Whether it’s overspending, under-protecting, ultra-borrowing or misplacing trust, the common denominator is an unconscious approach to managing your money.
Ross Levin is the founding principal of Accredited Investors Wealth Management in Edina.