We’ve worked with a lot of clients, and over time you start to notice some patterns. Everyone makes different decisions and has unique lives, but there are some common themes and mistakes that come up time and time again.
Some of these mistakes are minor. They’re not going to send you broke, but they might mean your strategy isn’t as efficient as it could be. Others can have much more significant consequences.
For wealthy individuals, there’s an added layer to this problem. Unscrupulous salespeople will often try to steer you towards mistakes. They’ll try to make you believe that you need something that you really don’t. They’ll charge you more for something just because you can afford it.
Mistakes can be incredibly useful training tools. It’s how we learn as humans. When something goes wrong, it provides us with feedback and context on what we can do differently to make sure it doesn’t happen next time.
The problem is that experiencing them yourself can be painful. So instead, let us help you learn from the mistakes of others.
The first mistake that wealthy investors make is believing they need a complex plan. In many ways, it’s understandable. Most of the advice either online or through a financial advisor is designed to cater to the majority. Its aim is to be applicable to the broadest number of people possible.
As someone whose net worth and/or income is well above the average, it’s not a stretch to believe that there is a need for a different, more convoluted strategy.
The reality is that, in most cases, that’s just not true.
There are many ways to make a financial plan more complicated. You can set up complex trust structures and special companies designed to hold investments. You can invest in niche, highly risky investments that lock your money away with no guarantee you’ll ever get it back.
These are often ‘sold’ to wealthy investors by a professional of some sort, who will be picking up some chunky fees in the process. Unless there is a very specific reason why you need a certain type of investment or holding structure, these complex strategies usually just add costs without increasing your returns.
It's that simple.
For most wealthy investors, keeping an efficient and streamlined strategy is going to provide the best long term outcome. Now let’s be clear. Simple doesn’t mean basic. An investment portfolio can be complex ‘under the hood’, without it complicating your own personal financial plan.
Most people all over the world have too much concentration in their financial lives. What we mean by this, is that their financial future is generally very heavily tied to one country.
If you live in the UK, work in the UK, own property in the UK and have the bulk of your investments in the UK, you better hope that the UK economy does well, or you could be in a bit of trouble.
This is a really common scenario, and most don’t have much choice in the matter. If someone’s living paycheck to paycheck, they don’t really have the ability to reduce this concentration risk, other than perhaps the way they invest their auto enrolment pension.
Luckily, wealthy individuals have a lot more options. Once you have sufficient resources to meet your day to day needs, you can start to diversify with the rest.
You can hold investments in various different countries. This will allow you to be exposed to multiple different economic environments which will spread the economic risk. It will also allow you to generate income from multiple different places.
This reduces your ties to a single country, which means you’re ‘backing many horses’, rather than relying on one winner to come through.
Wealth investors are generally surrounded by successful people. Whether it’s in social circles, through business connections or just close friends and family, there is a strong survivorship bias in people who’ve taken big risks that have paid off.
Survivorship bias is the concept that something looks more simple or common than it is, because we only hear the success stories. For every Jeff Bezos or Bill Gates who started billion dollar companies in their garages, there are millions of people who did the same thing, but didn’t make it.
Fortune magazine isn’t doing a profile on Gary from Indiana who works in sales and once had a startup that never made it.
When you spend time around other wealthy people, many of them will have made a success from taking high risk. And that can make you feel like you need to take high risks too.
The reality is, you probably don’t need to. An advisor can help you with this, but in many cases you will already have enough in the way of assets and income to live a comfortable life that fulfils all your needs. As long as you have the right strategy.
That’s not to say you can’t take risks. You can start a business or invest in a long shot project. But you can do this in a measured way that doesn’t jeopardise your lifestyle. You don’t need to hit a home run with every financial decision you make.
For many investors, the best strategy is to have a core plan that is simple, efficient and long term. You can get more complicated with the rest, as long as it’s money you can afford to lose.
Setting things up this way means you have a plan and a strategy that provides a safety net for the more high risk, high reward decisions you want to make in life. It gives you the freedom to make these bets, because it means you’ve always got something to fall back on.
Please note that this is not a financial advice and it does not take into account individual circumstances. Please also contact a professional advisor prior to any decision making.
The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. You should be aware that past performance is no guarantee of future performance.