3 Mistakes High Net Worth Clients Make When Investing

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Money doesn’t buy investment omnipotence. Here are some of the mistakes even the wealthiest investors make. 

As modern society is quick to highlight, everyone makes mistakes. We all stumble at some point, and we do so in every aspect of our lives. Even education and training can’t prevent every misstep.

So, when we talk about mistakes in investing, it’s not just the everyday salaried worker and their retirement fund. We can also talk about the mistakes of high net worth investors whose decisions command millions of dollars’ worth of investments.

Oddly enough, though, the conversation isn’t that different.

Many of the general investing mistakes made by the wealthy are also those being made by your everyday investor. Here are three common examples.

1. Being too self-reliant

The problem: A few things are at play here. For one thing, many high net worth investors also own or run businesses. They’re used to making a lot of big calls on their own, so managing their own investments feels like par for the course. Moreover, the thought process may be, “If I can grow a business, I have the financial acumen to handle investing.”

It’s hard to dedicate a substantial amount of time to managing your investments if you’re also running a business. Plus, the knowledge you need to build a business is very different from the knowledge and experience it takes to successfully invest. Stock brokers and other financial advisors have specialized training that typically makes them better suited to the task.

What we can learn: Many of us are just as guilty of this one as the wealthy, and often for similar reasons. “I watched a YouTube video, how hard can it be?” But it could also be due to the perceived costs; hiring a specialist of any kind is rarely cheap.

In general, sure, a simple retirement account that you rebalance once in a while doesn’t need an Ivy-League-educated wealth management specialist. But there are many situations where you really do want to consult a financial professional.

For example, if you’re maxing out your retirement contributions and are ready for an investment account, a one-time session with an advisor could help you decide how to best reach your long-term financial goals. Consider the fee as part of your investment; ideally, it will pay off in actionable advice for the future.

2. Failing to diversify

The problem: One common issue faced by many high net worth investors is that a lot of their assets will be tied up in a single business (their own). While this makes sense — reinvesting back into your business is what makes it grow — it’s not the safest investment strategy.

“Don’t put all of your eggs in one basket.” This is time-honored advice, not just for transporting ovum, but also for investing. Basically, the more diversified your assets are, the less likely you are to suffer irreparable losses when something goes wrong. If the market turns and your business suffers, your overall wealth can also be greatly impacted if most of it is tied up in said business.

What we can learn: Everyone should have some diversity in their portfolio regardless of its size. Your 401(k) or IRA shouldn’t be 100% stocks or 100% bonds, for example. Most online brokerages will help you choose an asset mix based on your own risk tolerance when you set up your account to ensure your investments aren’t overly concentrated. Just be sure to check up on your account regularly and rebalance when needed.

3. Collecting instead of investing

The problem: Ultra wealthy investors really like alternative investments. (These are basically all the things people invest in that aren’t stocks and bonds. This includes things like real estate, private equity, and art.) According to one study, ultra-high-net-worth investors have around 50% of their assets in alternative investments.

However, as we’ve all seen in the headlines, sometimes these “alternative investments” are less about investing wisely, and more about growing a collection. It might be sports cars or expensive wines, or even multimillion-dollar estates. While these collections can certainly hold value, they’re not always the best use of investible dollars.

What we can learn: The rich aren’t the only people letting their collections drive their spending. Bags, shoes, movies, books, dice, cat figurines, superhero t-shirts… Most of us collect something, and a lot of us overspend on those collections to the point that they can easily overwhelm our living spaces as much as our bank accounts.

It can be especially bad when we’re convinced our collectibles are going to appreciate in value. But the occasional action figure or stuffed bear aside, most of what we accumulate is only valuable to us. So, while it’s all well and good to buy some things simply because they make our inner gremlins happy, be sure you’re not harming your ability to reach your financial goals.

Don’t be afraid to make mistakes

Rich, poor, college-education or school of hard knocks — everyone is going to make mistakes, even (or perhaps especially) with their finances.

It’s not about never making mistakes, it’s about having the tenacity to bounce back from them when they happen. So, don’t kick yourself when you’re down; learn from the mistake, move on — and make new ones next time.

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