Why people make poor investment decisions

News.com.au recently published an article that surveyed a sample of average Australians. The survey focused on whether Australians considered themselves to be "rich or comfortable.” Based on their responses, the participants confirmed that "money alone does not maketh the man rich".

What makes you feel 'rich' is your perception; your attitude to life and all it holds. Money is simply the means to achieve your goals. Let me explain:

q) what do we really need in this life? a) food, water, shelter, clothing

q) what do we really want in this life? a) status symbols relevant to food, water, shelter and clothing!

All too often we chase the illusion of success - adorning ourselves with 'various products, labels & brand names' to show off our perception of our own success - to other people.

When we allow our emotions to rule our head many people make poor investment decisions. For example, otherwise intelligent people go to extraordinary lengths to parade their idea of 'success' … by their choice of a luxury vehicle.

Similarly – when choosing where to invest in property, many people allow their emotions to influence that decision as well.

The worst two emotions in this respect? Ego & Greed!

Sadly, for many people buying a new car is often a poor financial decision driven by ego in the hope that friends and family (and those random people they don't even know) will think that they're doing well in life.

The reality for most people though is far from that. They can't afford that car, so they take a lease or personal loan over 4 or 5 years, and most often with a 30, 40 or 50% ‘balloon/residual payment’ at the end.

Want that in plain English? A balloon payment means you won’t - or can’t - pay off the vehicle in the specified time - if that car has a 40% balloon you’ll only pay off 60% of the contract price - but you will pay interest on the whole amount.

In effect you're 'renting' that car, which is depreciating at least at the same rate. When the finance term is finished you either need to buy the vehicle at its residual value, or trade it in and start from scratch again.

All too often I see ‘ego driven investment decisions’ in the property market. People purchased a property in what they perceived as a quality - or affluent area - because of their own prejudices; because they wanted to impress people.

Or because they mistakenly believed they’ll achieve better capital growth. That’s right – as we all know – property values double every 7-10 years, don’t they? Mmmmmm – that’s a whole other article!

Many people fail to recognize that property investment is a ‘business decision’ – and the property needs to be viewed from an entirely different perspective.

Too many people purchase an investment property for all the wrong reasons: impressing your friends at the next dinner party isn’t a sound idea!

Generally speaking, ‘dinner party’ properties are ‘quite tax effective’ which is double dutch for ‘significantly negatively geared’.

Negative gearing to this extent is not a smart strategy and I’m on record as stating that it’s the #1 reason why so many Australians own just one investment property. ATO records prove that in 2011, 90.8% of Australian investors owned less than two properties. Last time I checked, less than 2 means 1 - what's more alarming is that also in 2011, investors lost a total of $13.2 billion to negative gearing!

Rest assured - this a sure way to financial disaster for most Australians; you might look rich driving that car, or with that negatively geared property portfolio. But you and I both know you certainly don’t feel rich, do you?

Listen up - whether your investment portfolio makes you 'rich' is out of your hands anyway!

Whether you’re ‘rich or comfortable’ is largely the result of the way our country 'works' .... or should I say, 'doesn't work'.

Even with a $200,000 income from your well-paying job, business or investment portfolio - after income tax, mortgage repayments, credit cards, car & personal loan repayments, a plethora of indirect taxes & levies and the cost of living - if you’re like most families you'd be lucky to save $1000 a month. Forget saving if your kids are in Private Schools!

It's easy to see why people on substantial incomes become jaded:

• years of striving for excellence in high school, followed by
• years of application to the task in university, followed by
• years of climbing the corporate ladder until you reach the pinnacle, and
• that $200k income and the expected ‘prestige’ that goes with it
• or should I say the self-realisation that you're in the same rat race & on the same treadmill as everyone else; except your treadmill costs way more to operate

Guess what? Unless YOU LOOK AT YOUR OWN SITUATION & DO SOMETHING ABOUT IT, it's not going to get any better in your lifetime. The statistics below reinforce what you're really up against.

Australia’s estimated population is 23.4 million (ABS @ May, 2014).

Let's have a closer look though: according to the 2011 Census there's around 5.7 million kids, 2.37 million people on the aged pension, 850,000 of us on the invalid pension and over 1.5 million on other Government benefits.

Plus 929,000 full time students over the age of 19 years. Ah ha - mustn't forget the 1.8 million Government employees too.

If you just did the math – yep - 13.2 million Australians indirectly rely on the taxes paid by the 10.2 million people who work in the private sector. It’s a ‘broken’ model; 56% of the population relying on the taxes paid by 44% is simply out of whack, unsustainable & can’t work over the 'long term'.

The 2014 Federal Budget was recognition that the ‘system’ isn't working … and that it looks like becoming increasingly worse over the next 40 years or so. It’s unfunded and systemic.

Will the age pension be around when you reach 70? I doubt it. Will your negatively geared properties fund your retirement?

Unless you pay out the mortgages in full before you retire, I wouldn't bet on it.

What to do about your future? You need to reassess your investment and financial decisions and eliminate ego and greed from your mindset. When you do this and start thinking like a 'real' investor, you will be able to put an asset base together that can provide for your future - not take from it.

You should consider the long term 'financial damage' before you sign that Contract. We can help you create your strategy, but I wouldn't wait too long to get started.

About Kevin Lee

Kevin Lee is the property investment expert and buyer's agent at Smart Property Adviser.

Kevin specialises in helping investors identify and acquire positive cashflow properties that generate high rental returns, enabling his clients to grow their portfolios.

Kevin's free report "How To Turn Your Negatively Geared Property Into A Positive One In 3 Steps - Without Selling" is available at www.smartpropertyadviser.com.au.