Mr and Mrs Smith, both healthcare professionals in their mid-50s, exemplified financial responsibility. They had eliminated their mortgage debt and built a diversified investment portfolio worth $500,000 through consistent contributions.
Their carefully structured financial plan was steering them confidently toward retirement, backed by stable professional incomes and sound investment strategies.
And then comes the ultimate test… the allure of ‘easy money.’
The Covid era property market was booming, and stories of quick profits were everywhere. The Smiths’ quarter-acre section seemed to present an irresistible opportunity: Build a new home at the rear, relocate there upon completion, and sell their existing house for a substantial profit.
Seduced by tales of fast profits and neighbourhood success stories, their plan appeared simple. Like many others caught up in the market euphoria, they saw it as a straightforward path to accelerate their retirement savings—overlooking the fundamental risks of departing from their proven financial strategy.
The Plot Twist: A Perfect Storm
What the Smiths couldn’t foresee was how quickly multiple risks could converge.
Mrs Smith’s unexpected illness forced her early retirement from nursing, which was a scenario they hadn’t adequately insured against. They had secured life insurance, but had deemed income protection for her unnecessary, viewing her income as secondary to her husband’s. This decision would prove costly when that income was no longer available.
Simultaneously, their foray into property development coincided with unprecedented market volatility. Construction costs skyrocketed - building materials doubled in price, and labour expenses soared beyond all projections. As healthcare professionals venturing into development as a ‘weekend activity,’ the Smiths lacked the expertise to navigate these challenges effectively.
The combination of reduced income and escalating construction costs forced the Smiths to draw heavily on their investment portfolio.
Their $500,000 safety net rapidly diminished—a devastating blow to their retirement planning. Upon completion, they faced an impossible choice: sell at a significant loss as the property market had declined from its peak or become reluctant landlords to recoup some costs.
Now in their early 60s, the Smiths find themselves in a precarious position. Their once-diverse portfolio is now concentrated in a single property market in Hawke’s Bay, New Zealand.
They’ve become unwitting landlords, sharing their quarter-acre with tenants—a situation they never envisioned. With several years until New Zealand Superannuation eligibility, they face an uncertain financial future.
While the Smiths may not be real, their narrative is one we’ve seen play out countless times. Instead of undoing all your hard work chasing an ‘easy’ solution, here’s how you can stay focused on long-term success.
Respect your core competencies
You may be an expert in your field (like the Smiths), but that doesn’t automatically translate to expertise in other areas. Property development, for example, requires specific expertise and market knowledge, and any project involving significant capital deserves professional scrutiny from someone with the relevant qualifications and skill.
Comprehensive Risk Management
When making insurance decisions, don’t base them solely on income hierarchy. Both partners need to maintain adequate coverage regardless of earning levels, especially if you are depending on both incomes to finance your current lifestyle or fund projects. Additionally, keep in mind that emergency funds are sacrosanct – not to be used for speculation or knee-jerk investments.
Diversification is Non-Negotiable
The Smiths put all their eggs in one basket (or more accurately, in their own backyard). Concentrating on a single asset or location magnifies risk. If it goes wrong, you have no other horse in the race.
More than simply not focusing on one asset, be sure not to focus on one class of asset either – or one geographic location when investing. Geographic diversification provides crucial protection against local market downturns.
No to Market Timing, Yes to Due Diligence
Don’t get swept up in the hype when something starts to skyrocket. Booming markets require more caution, not less, because they are often at or near the peak by the time we hear about them – and there’s only one direction they’ll go after that.
“Word on the street” success stories often serve to hide the underlying risks of this approach. Additionally, for every success story, there’s innumerable others who missed out on the same stroke of luck. Talk to a financial adviser before you jump into a ‘hot’ opportunity and think critically about what would happen if you took the big chance and it didn’t pan out.
Protect your Progress
Unfortunately, it’s all too easy to undo years of disciplined saving with a single miscalculation. If you’re approaching retirement, you need to start being more conservative – not looking for ways to ‘get rich quick’.
Ego should never drive financial decisions. Before you step on the gas or panic because you think you ought to be doing what everyone else is, talk it over with the professionals and see if your financial plan can’t be adjusted in less dramatic (and risky) ways.
Seeking help on your financial journey
In the end, the cost of quality financial advice is often dwarfed by the cost of making major financial decisions without it.
Not all financial advice is created equal. The right adviser isn’t someone who simply agrees with your ideas or sells you products. Seek out and value the guidance of a qualified, fiduciary financial adviser – a fiduciary is someone who, in writing, will declare that they put your interest ahead of their own.
They can provide evidence-based recommendations and aren’t afraid to give you the honest, sometimes challenging advice you need to hear.
Your financial future is too important to be left to chance, market trends, or untested assumptions. There’s a better way.
