“Millionaires make some of the same investment mistakes as everyone else — it’s just that their mistakes can cost more,” says personal financial journalist Robert Frank, writing for CNBC.
Those top investing pitfalls were revealed in a survey by the deVere Group, a global independent financial consultancy, when they asked millionaire investors across the globe to reveal the number one investing mistake they made before seeking professional advice.
Here’s what the wealthy say about their top money blunders, and how you can avoid making the same mistakes.
#1. Failure to diversify
Hands down, the most common mistake was failing to diversify.
Concentrating too much of your portfolio in the same area can magnify risk and court disaster.
We saw this with investors who had way too much in tech stocks and were wiped out by the tech meltdown, or went into the 2008 recession with serious overconcentrations of financial stocks.
Even worse are investors who have oversized positions in a single stock, either because it’s “doing well” or they don’t want to sell and pay capital gains.
Far too many millionaires have learned the hard way that this mistake can destroy wealth in a matter of minutes.
The Fix: Maintain a globally diversified portfolio including stocks, bonds, and alternatives to help limit your losses, whatever the current market environment. Be vigilant about cutting back oversized positions in individual companies, and keep an eye on sector weightings as well.
#2. Investing without a plan
Investing without a structured plan is the second most common mistake.
“To my mind, unless you have a sound investment plan you are gambling, not investing,” says Nigel Green, founder and chief executive of deVere.
The key to building an effective portfolio is to understand your goals, your risk tolerance, and what you need your investments to do for you.
Some investors have haphazard portfolios stuffed with a little bit of this, and a little bit of that, but the overall portfolio makes no sense given their goals.
We recently reviewed the portfolio of a conservative 85-year old widow whose portfolio included several high-flying, non-dividend paying social media stocks picked out by her son. They made sense for him, but should they really be in her portfolio?
The Fix: Structure your portfolio to meet your goals and your risk profile. Know your asset allocation and stick to it, and understand why each holding is in your portfolio and what purpose it serves.
#3. Making emotional decisions
Even millionaires are not immune from making damaging emotional decisions, ranging from falling for the brother-in-law’s goofy investment scheme (because they just can’t say no), to overindulging grown children who seem incapable of supporting themselves, to selling in a panic when the market tanks.
“Working with an independent financial adviser is one recommended way to help take excessive emotion out of the equation,” says Nigel Green of deVere. Advisors often serve as financial bodyguards for the nation’s wealthy, vetting questionable investment proposals and quarterbacking complex financial transactions.
Without impartial advice, many people have a hard time deciding how much – and how best – to “help” family members financially. And it’s no secret that almost everyone needs moral support and expert guidance in a rocky investment market, like the 2008 financial collapse and its aftermath.
The Fix: One foolproof fix for battling bad emotional decision-making is to involve a seasoned, impartial professional who can keep you on track with a disciplined, rational approach.
#4. Failing to regularly review the portfolio
With super busy social and business lives, it’s no surprise that wealthy people say they couldn’t always give their portfolios the attention they deserved.
Each day, the economic and global outlook changes. Tax and estate planning strategies evolve. Your investments need to be reviewed and rebalanced periodically to make sure they are still working for you and make sense in your overall plan.
It’s just like clothing. What was smoking hot when you were in your 20s might not be a good fit in your 50s, and weeding out your portfolio is no different from doing your spring closet-cleaning.
When we review client portfolios each quarter, our scrutiny ranges from the close-up — individual holdings that might have done so well that they now need to be cut back (e.g. time to take some money off the table), to the big picture — a client who needs to bump up her stock allocation to plan for expected longevity.
The Fix: “Buy-and-hold” doesn’t mean “set-it-and-forget-it.” It’s good to be a patient investor with a long-term perspective, but periodic reviews give you the opportunity to update and redirect your portfolio as your financial situation, and the global environment, evolve.
#5. Focusing Too Much On Historical Returns
We’re all familiar with the disclosure that past performance is no guarantee of future returns, right? According to the study, even millionaires forget that reminder.
It seems obvious in retrospect. Whether it’s tech stocks in 1999, or home prices in 2005, hot investments don’t stay that way forever.
Rather than focusing on that five-star investment that’s done so well, you might want to seek out the ugly duckling that’s poised to morph into a swan.
Wealthy investors also forget that while investing well is golden, saving well is … well, it’s priceless.
With interest rates at historic lows, and expectations for lower investment returns in the future, you can’t pin all your hopes on the market. Even the six- or seven-figure earner needs to put aside money for a comfortable financial future (and of course, the more you make, the more you need to be comfortable!).
The Fix: When it comes to investing, don’t always follow the leader, and look ahead – rather than behind – to forge your investment future.