Tuesday, April 23, 2024

The Importance of Minimizing Your Liabilities When Lifestyle Investing

Death and taxes are the only certain things in life, so we are told. Unfortunately, that means most other liabilities are harder to pin down. Financial losses, market downturns, and unexpected expenses can all undermine an unguarded attempt to build wealth.

If you’re a lifestyle investor looking for ways to align your values and your financial activities for the betterment of yourself and those around you, it’s important to find stability within yourself and your relationships. You’ll want your life and finances to display solid opportunities throughout that process. Here are a few reasons you should make an effort to minimize your liabilities when lifestyle investing.

1. Lifestyle Investing Can Be Emotional

Lifestyle investing is a powerful way to infuse deeper meaning into the cold and calculated acts of money management and wealth generation. For instance, if you have a passion for sustainability, you can align this with your investing activities by looking for green tech or renewable energy companies poised for explosive growth.

On a more personal level, lifestyle investing could involve establishing financial freedom and autonomy. Setting up passive income streams and a sustainable source of long-term wealth can allow you to focus on other lifestyle-related things. Continuing education, travel, and even relocating to an area where you want to live for personal reasons can all be side effects of successful lifestyle investing.

Syncing up your investments with your passions is a powerful and rewarding way to live life. However, it also introduces a strong emotional component to your wealth generation activity. Left unchecked, this can lead to disaster.

The best way to find balance here is to establish a clear code of conduct that can guide your emotionally-inspired investing. Naturally, this should also include a fair dose of risk management.

The financial advisors at Ameriprise Financial suggest three key strategies to mitigate risk and minimize liabilities when investing:

  • Allocate assets ahead of time.
  • Diversify your portfolio.
  • Use dollar-cost averaging to spread out risk.

This trio of cardinal rules—never to be broken—provides a framework within which your lifestyle investing can safely operate.

2. Lifestyle Investing Involves Other People

The idea of a “liability” when lifestyle investing extends beyond the balance sheet. You can also incur risk to relationships and causes that you care about. For instance, Lifestyle Investor Justin Donald is quick to highlight the need for wealth generation not to come at the expense of sacrificing one’s family.

“The point of making money is to spend it with people you love,” Donald explains, “Sadly, many entrepreneurs sacrifice their freedom to attain financial success, preventing them from spending time with those who matter most to them. When people fall into this trap, they will say that they’re ‘doing it for their family,’ but sadly, the family is the one who always suffers.”

The example touches on a sore spot for many investors. Often the act of making money comes at the expense of the very people or causes that the wealth is intended to benefit. When investing is specifically tailored to enabling a certain lifestyle, such as spending more time with loved ones, the hypocrisy is even more obvious.

If you want to be a successful lifestyle investor, you have to learn to keep your core values front and center. Generating wealth is merely a means to an end, and you can’t take unnecessary or unwise risks, or they’ll impact more than just yourself.

3. Lifestyle Investing is Where the Rubber Hits the Road

The last thing you want to do is make a rash or uninformed financial decision on your phone while stuck in traffic or on a tablet as you walk between meetings. This is never an ideal, desirable, or safe way to invest. But when it directly impacts your ability to live your best life, the impact is very real. You can see the fallout as you’re held back or restricted from achieving your personal and professional goals.

The problem is, investing can become formulaic, distant, and desensitizing over time. Looking at graphs, charts, and ticker symbols all day can dull their impact on reality. This can lead you to lower your guard, lose your perspective, and take on riskier investments.

The financial experts at Schwab point out the utter importance of remaining focused when investing. “By all means, reassess and rebalance [your portfolio], but don’t forget to stay focused while doing so. Trying to dump investments when both the market and your confidence are dropping disregards the adage ‘buy low, sell high.’”

The Schwab team goes on to explain that a more risk-averse approach to investing is ideal for those who struggle with an inability to retain focus and perspective. “If the head-for-the-exits feeling is familiar, you may be the kind of investor who would benefit from a more conservative portfolio—as part of your long-term strategy, not as a response to a market upset.” That said, the group also asserts that staying invested almost always pays off over sitting on the sidelines.

The takeaway here? Don’t be afraid to invest, especially in the pursuit of enabling your lifestyle. However, as you do so, make sure to establish safeguards that can assist you in minimizing your liabilities as you go along. That way, when emotions and other people come into play, you can rest in the fact that your investments are having a safe and positive impact on the things that you hold dear.

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