The ultra-wealthy, known as ultra-high-net-worth individuals (UHNWIs), make up a group of people who have net worths of at least $30 million. The net worth of these individuals consists of shares in private and public companies, real estate, and personal investments, such as art, airplanes, and cars.
When people with lower net worths look at these UHNWIs, many of them believe that the key to becoming ultra wealthy lies in some secret investment strategy. However, this isn't usually the case. Instead, UHNWIs understand the basics of having their money work for them and know how to take calculated risks.
- Ultra-high-net-worth individuals often understand the importance of savings, the basics of investing, and how to take calculated risks.
- Concentrating portfolios with investments only from the U.S. and the EU is an example of an approach that overlooks potential opportunities elsewhere, such as the emerging markets.
- UHNWIs do not try to keep up with their neighbors or compare themselves to others but focus instead on achieving their objectives and goals.
- Periodically rebalancing portfolios is essential when trying to achieve the right mix of stocks and bonds over time.
- UNNWIs often find opportunities in private markets that are overlooked by investors that focus only on public markets.
In the words of Warren Buffett, the No. 1 investing rule is not to lose money. UHNWIs aren't mystics, and they don't harbor deep investing secrets. Instead, they know what simple investing blunders to avoid. Many of these mistakes are common knowledge, even among investors who are not particularly wealthy. Here is a list of the biggest investing errors UHNWIs avoid making.
1. Only Investing in the U.S. and the EU
While developed countries such as the United States and those within the European Union are thought to offer the most investment security, UHNWIs look beyond their borders to frontier and emerging markets. Some of the top countries that the ultra-wealthy are investing in include Indonesia, Chile, and Singapore. Of course, individual investors should do their research on emerging markets, and decide whether they fit into their investment portfolios and their overall investment strategies.
2. Investing Only in Intangible Assets
When people think of investing and investing strategies, stocks, and bonds normally come to mind. Whether this is due to higher liquidity or a smaller price for entry, it doesn't mean that these types of investments are always the best.
Instead, UHNWIs understand the value of physical assets, and they allocate their money accordingly. Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold, and even artwork. Real estate continues to be a popular asset class in their portfolios to balance out the volatility of stocks. While it's important to invest in these physical assets, they often scare away smaller investors because of the lack of liquidity and the higher investment price point.
However, according to the ultra-wealthy, ownership in illiquid assets, especially ones that are uncorrelated with the market, is beneficial to any investment portfolio. These assets aren't as susceptible to market swings, and they pay off over the long term. For example, Yale's endowment fund has implemented a strategy that includes uncorrelated physical assets, and it returned an average of 8.1% per year between June 2006 and June 2016.
Jack Schwager: Investopedia Profile
3. Allocating 100% of Investments to the Public Markets
UHNWIs understand that real wealth is generated in the private markets rather than the public or common markets. The ultra wealthy may gain a lot of their initial wealth from private businesses, often through business ownership or as an angel investor in private equity. Additionally, top endowments, such as those run at Yale and Stanford, use private equity investments to generate high returns and add to the funds' diversification.
4. Keeping up With the Joneses
Many smaller investors are always looking at what their peers are doing, and they try to match or beat their investment strategies. However, not getting caught up in this type of competition is critical to building personal wealth.
The ultra-wealthy know this, and they establish personal investment goals and long-term investment strategies before making investment decisions. UHNWIs envision where they want to be in 10 years, 20 years, and beyond. And they adhere to an investment strategy that will get them there. Instead of trying to chase the competition or becoming scared of the inevitable economic downturn, they stay the course.
Further, the ultra-wealthy are very good at not comparing their wealth to other individuals. This is a trap that many non-wealthy people fall into. UHNWIs stave off the desire to purchase a Lexus just because their neighbors are buying one. Instead, they invest the money they have to compound their investment returns. Then, when they've reached their desired level of wealth, they can cash out and buy the toys they want.
5. Failing to Rebalance a Personal Portfolio
Financial literacy is a big problem in America, but everyone should understand the practice of rebalancing their portfolios. Through consistent rebalancing, investors can ensure their portfolios remain adequately diversified and proportionally allocated. However, even if some investors have specific allocation goals, they often do not keep up with rebalancing, allowing their portfolios to skew too far one way or the other.
A balanced portfolio typically includes the right mix of cash, stocks, and bonds based on a person's age and risk tolerance.
For the ultra-wealthy, rebalancing is a necessity. They can undertake this rebalancing monthly, weekly, or even daily, but all UHNWIs rebalance their portfolios on a regular basis. For the people who don't have the time to rebalance or the money to pay someone to do it, it's possible to set rebalancing parameters with investment firms based on asset prices.
6. Omitting a Savings Strategy From a Financial Plan
Investing is essential to becoming ultra-wealthy, but many people forget about the importance of a savings strategy. UHNWIs, on the other hand, understand that a financial plan is a dual strategy: They invest wisely and save wisely.
As a result, the ultra-wealthy can focus on increasing their cash inflows as well as reducing their cash outflows, thus increasing overall wealth. While it might not be common to think of the ultra-wealthy as savers, UHNWIs know that living below their means will allow them to achieve their desired level of wealth in a shorter amount of time.