Finance 6. Not respecting debt An obvious sin, but one into which all too many fall. Taking on too much debt – a big mortgage, a home equity line of credit, a car loan, high-interest credit card debt or all of the above – can be one of the surest ways to financial ruin. The financial consequences of not respecting the power of debt are clear. A sudden spike in interest rates (such as we’ve seen over the past couple of years) can force a 180-degree turn in your financial circumstances. And if you don’t have the flexibility to restructure or ‘roll over’ your debt into a longer term (many fixed-rate mortgage holders are facing just such a situation right now), you could create a very serious threat to your wealth. Perhaps a less-obvious consequence of not respecting debt is the mental toll which it takes. Debt is not only a financial burden, it’s a psychological one as well and the constant anxiety and worry about what you owe can weigh greatly on even the most experienced financial minds. All of which is to say that respecting the power of debt and keeping it at a reasonable level should be an important financial priority. For many people, that means becoming debt-free – nothing wrong with that. But a more balanced view is to see debt as a tool that works much like fire: if used properly, it can greatly benefit your life (with a mortgage, for example, or a loan to purchase a rental property or small business opportunity). If used unwisely, it can hurt you and potentially even burn down your entire financial house. 7. Believing that you have a crystal ball Investment markets are inherently complex, with a number of widely unpredictable factors (economic events, geopolitical occurrences, government policy, trader sentiment, advancements in technology and social trends, to name just a few) that can have a significant impact on the performance of any asset. This central fact explains why basing investment decisions on short-term asset price predictions, economic forecasting, guesses about the short-term direction of inflation/interest rates/tax policy/other economic factors can be so very dangerous. Most great investors know this. Warren Buffett, Peter Lynch, Prem Watsa and other ‘giants’ of the investing world freely admit that their ability to predict market movements or economic events is limited. And, while they try their hardest to understand and analyze business developments and long-term trends, they shy away from speaking in certainties or getting into any investment for which success hinges on correctly guessing what will happen a few weeks or months hence. If even the best of the best can’t do it with 100% accuracy, what makes the rest of us think that we can? Perhaps the most dangerous aspect of this sin is how it distorts one’s mindset. Instead of crafting a long-term financial strategy based on individual goals, risk tolerance and emotional discipline, it suggests that market timing is possible, guessing actually works and quick trading is the key to investment success. Nothing could be further from the truth. CSANews | SUMMER 2024 | 25
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