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Even the super rich make financial mistakes. Here are the top 5 blunders, and tips on how to avoid them
They might have more money than the rest of us, but millionaires and the super rich often make the same investment mistakes as others — including failing to diversify their portfolios.
We’ve all heard that portfolio diversification is a key tool to manage risk and that having a specific investment plan is one of the most basic investment rules we should follow. Yet we rarely do these things.
The same is often true of the super rich.
Having worked in the financial advisory sector for many years, I knew, anecdotally, this to be true. My belief was later backed up with a survey by my organisation, in which 880 high-net-worth individuals with more than $1 million in investable assets were polled, including many here in the UAE.
They were asked to disclose their number one investing mistake before seeking professional financial advice. Here are the five top investment mistakes the millionaires revealed.
Failing to diversify a portfolio adequately: Spreading money around is vital to curb risk. However, it must be done correctly. Diversification will only add real value if the new asset has a different risk profile.
The key is a long-term, multi-asset approach to investing, whereby investors choose a suitable combination of global equities and bonds. Financial history shows this combination to offer good returns relative to risk. Investors should try to be as diversified as possible, perhaps using the 60/40 model as their guide.
Investing without a plan: Unless you have a sound plan, you’re gambling, not investing. Anyone who has an investment plan can expect their portfolio to outperform those without a plan.
Making emotional decisions: It’s far better to stay calm, cool and steady when making financial decisions. Most decisions in life are emotional to some degree, but making excessively emotional decisions can prove costly when it comes to investments, because they are blighted by prejudices and biases.
Failing to review a portfolio regularly: Even the best portfolios can go off-target over time. Investments need to be reviewed and potentially rebalanced at least annually, preferably more often, to ensure they still deserve their place in the portfolio and that they are still on track to reach your long-term financial objectives.
Focusing on historical returns too much: Past returns have little bearing on the current environment. The future investment situation is likely to be different from time-aged averages.
Investing mistakes can and do occur. It is how they are best avoided, or at least mitigated, that is the key to success. Whether you’re a millionaire or not, we can all learn lessons from this and, of course, by working alongside an independent financial adviser.
It’s my view that, avoiding just one of these mistakes can literally make the difference between having financial freedom and security, or not.
The writer is founder and CEO of the deVere Group
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