Overinvesting puts retirement at risk
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Investopoly
Overinvesting puts retirement at risk
Sep 07, 2022 Episode 225
Stuart Wemyss

A Goldilocks investment strategy means that you are making the most of your financial opportunities without overdoing it and taking unnecessary risk. That is, your level of investing is exactly right (i.e., perfectly balanced).  

Underinvesting means that you risk not having enough investment assets to enjoy a comfortable retirement.  

Overinvesting means that you have taken unacceptable risks which may compromise your ability to achieve a comfortable retirement.  

The goal is to achieve a perfect balance – invest enough to ensure you will meet your lifestyle goals – but not too much that you put your lifestyle goals at risk.  

Overinvesting can do a lot of harm 

I recall working with a mortgage broking client (not financial planning) for several years prior to 2008. The client purchased 6 investment-grade properties over a relatively short period. After the sixth acquisition, I advised the client to not purchase anymore properties, as I felt taking on more debt would be too risky. The client ignored my advice and purchased two more investment properties – which I only found out about after the fact!  

Unfortunately, the GFC hit Australian shores in 2008/2009 and the RBA cash rate climbed to 7.25% which put pressure on the client’s cash flow. Worse still, credit rules and policies were rightfully tightened which locked this client out of their ability to refinance. The client had no choice other than to sell all but two of their properties in the years following 2010 because they wanted to retire.  

This client’s story is a perfect cautionary tale. Debt is a wonderful servant, but a terrible master. Borrowing to invest can be a very powerful and beneficial strategy but it must be used carefully. You must never borrow more than you can afford and should consider your ability to service repayments when interest rates rise. For example, what if you are forced to eventually repay principal and interest. Or due to borrowing capacity, you can’t refinance e.g., you are trapped at your current lender. You must consider these risks.   

Underinvesting comes with great opportunity cost 

Arguably, underinvesting is just as bad as overinvesting. Underinvesting means that you risk not accumulating sufficient investment assets to achieve your lifestyle goals i.e., funding a comfortable retirement.  

I wrote a blog earlier this year (here) setting out the three common reasons that tend to cause

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