Investment Blunders Celebrities Make
When it comes to investing, while celebrities may have more money to invest than the average investor, their results are not necessarily stellar – and, in some cases, it may be worse. Certain mistakes seem to occur more often in the case of celebrities, perhaps due to the unique pressures facing such individuals. We look at some of these mistakes below.
Overpaying for Real Estate
Celebrities seem to be especially drawn to luxury real estate. While owning a flashy pad is not a desire limited to celebrities, it does seem that this class of investor is overrepresented among purchasers of luxurious residences. The problem with buying such properties is that the market for this type of home is limited. When the economy gets bad, ultra-expensive homes can experience dramatically greater declines in value than more moderately priced residences.
Additionally, celebrities are known for buying second and even third homes (or more) in various locations. In many cases, they would be better off just renting if they don’t intend to live in an area year-round. If a celeb’s finances experience stress, being forced to sell a second or third house fast can result in a hit to the bottom-line. Similarly, if a celebrity overpays for their primary residence they can take a substantial loss on the house even in a good market if they find they need to sell it quickly.
Unrealistic Projections of Future Earning Power
There’s no business like show business when it comes to making money fast. While it’s true that in many cases stars have toiled for years to master their craft prior to hitting it big, once they make it to the top the money can come in fast and furious. At the same time, when a celeb hits the downside of their career, their income can dry up faster than the Los Angeles river in summertime.
Some celebrities reach a level where cash flow remains steady for an extended period of time: think rock bands like U2 and the Rolling Stones or movie stars like Robert DeNiro and Meryl Streep. But this is not necessarily the norm and celebs who spend like they were in their peak earning years when they aren’t are an all-too-common phenomenon. Spending as if you will always make what you are making today is dangerous for anyone: if your income drops precipitously and you haven’t set funds aside for a rainy day your standard of living could decline substantially; you should always attempt to set funds aside from your current income if possible to help tide you over if your income should falter in the future (or to help fund your retirement).
Selling in a panic when an investment falls significantly in value is an investment mistake not limited to celebrities. However, given their high profiles, when a celebrity investor gets spooked by a market decline and dumps all their stocks or mutual funds, it’s more likely to get noticed. Unfortunately, selling after the market has crashed or declined steeply is likely to be the worst time to sell; in the long run, the stock market typically recovers from sell-offs and goes on to eventually reach new highs.
It’s not hard to find celebrity-run or sponsored restaurants; they seem to be everywhere these days. Unfortunately, almost as many restaurants close as open every year, a sign of just how tough it is to make money in the industry. While the temptation to be involved in haute cuisine may be too tempting to pass up, celebs, just like ordinary investors, should think twice before putting their hard-earned money in a restaurant given the industry’s high attrition rate.
Chasing Hot Stocks
The saying on Wall Street is that by the time you read about a stock in the newspapers it’s likely too late to make much money on it. Celebrities would do well to take this advice, but more than a few find this hard to do. Instead of looking for undervalued assets better positioned to do well over the long term, they often chase after the latest trendy stock, only to find themselves suffering significant losses when the trend reverses, as they generally do at some point.
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CFP Samuel Rad is an award winning fee-based Financial Planner with Affluencer Financial Advisors in Los Angeles, California. Mr. Rad has multiple licenses in the investments, real estate and insurance fields. He has spent a considerable amount of his career lecturing at universities and companies, on financial topics such as financial planning, retirement planning, and estate planning.
He currently lectures at UCLA and West Los Angeles College.