FINANCIAL PLANNING: Rich can make bad money decisions too

Success isn't a guaranteed outcome, being wealthy doesn't mean all money decisions are prudent. Bad financial decisions can be detrimental for wealth building.

Even rich investors have made rash money decisions that have led to big losses. Being wealthy is not just about how much money one makes, it's about your mindset towards how you use the money.

There are many cases where the wealthy decide to manage their money on their own or outsource it either to a friend or a family member. When this is the case, they usually learn it the hard way by ending up in a multitude of financial traps. Though investing looks easier than it actually is, more often than not it is best to leave your money planning to expert financial advisors. It is good to seek professional advice or employ expert services who can help you avoid bad investment choices

Here are some kinds of bad decision traps that the wealthy fall into:

Getting swayed by trends: Investing into new age trends, more specifically without understanding the nature of the underlying activity can seriously affect outcomes. Chasing past performance in the mistaken belief that historical returns predict future investment performance. For instance, the previous year's returns makes an attractive case for investing in equity mutual funds. However, the trend should not steer you from realising the risks involved in investing in these funds. Maintaining the appropriate balance in investing is important for optimal experience in investing. Don't just chase past performance, choose a great portfolio rather than just great returns.

Taking too much risk: Taking big and huge bets which is a hallmark of wealthy investors can sometimes backfire badly. It's good to go beyond one's comfort zone, but that does not mean one can go overboard. Be calculative and diligent in your investments. There has to be a moderation in risk taking.

Over diversifying: Making multiple and diversified investments across a wide array of assets, businesses is not very conducive. There is a loss of focus and lack of clarity in the process. This eventually delivers a below par outcome. Rather than placing 15-20 minor bets with a lower probability of returns, it is best to target five to 10 sizeable stakes with higher prospects

Investing emotionally: Investing in a business due to peer pressure because of family and friends is not prudent. Making emotional decisions over logical ones can set you up for failure. If you are successful and rich, someone in your circles is sure to ask you to invest in their business. Not analysing the business before making a decision to invest can make you regret later. Knowing where to invest and the ability to gauge opportunities early on is the hallmark of the super-rich guys.

Biases: Behavioural biases can create a major impact on investment decisions. The personality type and behavioural bias of an investor can lead one into making irrational money decisions. For instance, an investor with a 'familiarity bias' will be hesitant to diversify his portfolio and will only opt for familiar or known investments. Similarly, those with 'confirmation bias' tend to seek information that reiterates or confirms their opinions and choose to avoid information that challenges their stance.

Not investing early: Delaying key financial decisions can cost you dearly. Financial planning should start from the day you start earning. Taking control of one's finances is the first step towards being wealthy. Some have the tendency to push money planning to another day or postpone it till the last minute, simply because they have something else to do or they don't understand it.

The writer is founder and managing partner, Germinate Wealth Solutions