6 Destructive Mistakes High Net Worth Individuals Make

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(Newswire.net — November 16, 2020) —

Stories abound of lottery winners who lost it all. But, they are not the only ones. Even high net worth individuals and families make grave mistakes that threaten their wealth. These mistakes end up costing more in the long run while impacting inter-generational wealth.

You only need to look at some of the billionaires that declared bankruptcy in 2019 to realize the influence of these destructive wealth mistakes.

Money is an emotional subject for most people, including high and ultra-high net worth individuals. A great fortune does not stop emotions from interfering with your investment choices — decisions that should be made logically and analytically.

However, letting emotions run money is just the tip of the iceberg. Here are other destructive mistakes by high net worth individuals that can decimate fortunes.

#1. Failure to adequately diversify

High net worth individuals and families are prone to under diversification. For instance, owning 20 different stocks in similar industries is basically putting all your wealth into just a single company.

A correction in that industry might send stocks crashing, as happened in 2000 to tech stocks, and more recently in 2020 to airline stocks, reducing your portfolio significantly.

Similarly, some high net worth individuals get best stock options from their employers. Since they work for the company and strongly believe in the upside, they hold a significant portion of their portfolio in this single stock.

Unfortunately, this is extremely risky.

If the company collapses, as many have in the past, the individual’s wealth gets decimated within a short period.

Diversification shouldn’t be just about spreading risks, but also about creating an effective asset allocation strategy. Therefore, HNW individuals should aim for a well-diversified portfolio across asset classes, industries, and regions.

#2. Questionable due diligence

Would you invest in a company you just heard about in the news without proper due diligence? Of course not. That’s akin to portfolio suicide. And yet, countless high net worth individuals invest on a whim or sketchy due diligence.

In the pursuit of the next big score, they forget the cardinal rule of money: Don’t lose it.

Due diligence involves looking at an investment from every perspective. What’s the investment’s outlook over the short and long-run? Who are the key people in the company, and how liquid is the investment?

Unfortunately, that’s just the surface. Investors may also need to look at legal and regulatory hurdles and the legitimacy of the business. In exploring the legal aspects, consulting a reputable legal business directory like Chambers and Partners reveals fiduciary services experts such as Asiaciti Trust, an international trust and corporate services firm.

High net worth individuals should diligently explore potential investments from all angles to determine risk and exposure. It pays off handsomely in the long run.

#3. Ignoring costs and fees

Over the long run, even the slightest costs and fees add up. Indeed, the more valuable your portfolio, the more significant the impact of high investment costs.

For example, $10 million invested over 20 years with annual costs of about 1.5% pales in value to the same portfolio invested at just 0.5% costs. That 1% difference translates to millions over those twenty years.

#4. Tunnel vision on the short-term

All too often, high net worth individuals focus on the short run to the detriment of their wealth.

First, a short-term investment focus carries more risks compared to more extended periods. You may invest during a bull market, only for a correction to occur that shaves off your wealth. If you sell during the correction, you lose. However, waiting it out might significantly increase your wealth.

Why? Because in the long run, stock performance and investment value tend to go up. That’s why the stock market is one of the globally recognized ways to build wealth over the long run.

Additionally, some HNW individuals sell a quality investment too soon, either due to a cash crunch or short-term valuation metrics. Such moves tend to erode wealth over the long run.

#5. Mixing emotions with investments

Heartfelt, emotional-based decisions may work well in other areas, but not in investing. Basing your investment decisions on fear, greed, passion, herd mentality, among others, can be catastrophic.

And yet, even high net worth individuals fall into this trap. They invest based on lopsided arguments and research, a hunch, or prodding from a family member, often with disastrous results.

As renowned billionaire investor Warren Buffett said, “You only find out who is swimming naked when the tide goes out.”

Don’t be the naked person.

#6. Inadequate cash reserves

Cash is king, especially in investing. Inadequate cash reserves can force you to liquidate a position at the worst possible time. It also deters you from exploiting valuable opportunities that happen once in a while.

Having a high net worth doesn’t guarantee smooth sailing if you don’t have cash. A slight market correction, a black swan event, or another crisis such as the Covid-19 pandemic can upend your fortunes and leave you dangerously exposed.

Learn from the best. Buffett, for instance, keeps a sizable stash of cash and equivalents to react to emerging situations.

Building wealth is as much about playing great offense (generating income) as it is fronting a great defense (avoiding mistakes). However, in the long run, preventing disastrous mistakes separates the consistently wealthy from the rest.

You can increase your net worth if you have some to begin with; rebuilding from scratch after a catastrophic mistake takes a lot longer.