#TBT: Six Investing Faults That The Uber-Wealthy Avoid
This may be surprising, but not everyone who is rich is famous and not everyone who is famous is rich. In fact, the vast majority of individuals who are classified as "ultra high-net-worth"(UHNW), or those with a net worth of at least $30 million, are people that you may have never heard of, and there's a good reason for it: if everyone knew how to get rich, then no one would be rich.
I was inspired by this article from Investopedia recently, which gives great insight on the process of getting wealthy - by telling you how NOT to get wealthy through the process of investing. The following six items are investment mistakes that you'll never catch high-net worth individuals committing. Regardless of how much money you have to invest, all of these points can help you get to a comfy position in the investment world - you may not be a multi-millionaire by retirement, but you will at least be far better off than "average" people.
1. Only investing in American and European companies
Most people stick to companies they know, and the majority of the time these companies are located in the USA, Europe, or other developed economies like Japan. Have you ever thought about investing in Indonesia, Chile, or Singapore? Exactly. UHNW investors are always looking for new opportunities for stocks in developing markets to boost the return of their portfolio. Obviously, you shouldn't allocate 100% of your portfolio to high-risk developing markets, but having this diversification is very important.
2. Only investing in 'intangible' assets
Stocks, bonds, money market funds, etc. are all great ways to invest abstractly, but there is nothing tangible about them. You can hold a piece of paper, but you can't convey its worth to anyone else. UHNW individuals include many tangible assets in their portfolio that will only increase in value over time. Consider adding things like gold, real estate, land, artwork, antiques, or even vintage cars to your portfolio over time for even further asset diversification.
3. Allocating 100% of investment money to public markets
Everyone looks to publicly-traded stocks and bonds for capital appreciation, but it may surprise you to learn that UHNW invest a good chunk of their money in private businesses as 'angel investors' or 'venture capitalists'. There is high risk, but there are very high returns to be had in some cases. For example, Mitt Romney was able to grow his IRA to over $100 million by investing in private equity, and some university endowments (such as Yale and Stanford) also invest a large portion of their money in private businesses.
4. Constantly feeling the need to outwardly express wealthy status (i.e. 'Keeping up with the Joneses')
UHNW investors are very good at not comparing their wealth to other individuals, and this is a trap that many non-wealthy people fall into. UHNWIs will avoid the desire to purchase a BMW just because their neighbors are buying BMWs. As I mentioned earlier, if everyone is rich, then no one is rich -- keep the focus on your own long-term wealth and goals and don't worry about what your neighbors have. They may blow all their money on big houses and fancy cars, but come retirement they may not be able to feed themselves.
5. Never re-balancing a portfolio
Everyone with a portfolio needs to understand the concept of 're-balancing'. Through consistent re-balancing, investors can ensure that their portfolios remain adequately diversified and proportionally allocated. However, even if some investors have specific allocation goals, they often do not keep up with re-balancing, allowing their portfolios to skew too far one way or the other. UHNW investors will re-balance regularly to ensure long-term capital appreciation.
6. Not having a Savings Strategy as part of the investment plan
Invest wisely, save wisely. This is the motto of UHNW investors. Investing is the number-one way to become ultra-wealthy, but many people forget about the importance of a savings strategy. They many not necessarily spend all of their capital gains on fancy cars and dinners - usually it goes right back into savings for the next big investment.
(This post was originally published on GradMoney on July 25, 2017)