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How do the Wealthy Invest?

November 17, 2002

If we knew how the wealthy invest, we can begin setting the stage for our own financial success. Who else can teach us the prudent and secure steps toward increasing our chances of building wealth than the rich themselves who constantly ponder ways to do so? In spite of the fact that the wealthy also make significant mistakes that affect their gains, they remain on top of their game and bring in money, making the envy of many people. That is no accident. With diligence and the ability to get the proper financial advice, they have the knack for succeeding in enhancing their assets.

A recent Trust survey covering wealthy individuals revealed that one-third of respondents obtained their fortune by investing. Their secret, of course, lies in the right investment vehicles to choose. How can we imitate the wealthy and succeed as well? Here are some tips:

  1. Portfolio diversification. Successful wealthy investors have learned that betting on single stocks, such as Tesla Motors or Apple, and hoping to catch a windfall is often a worthless and risky move. A study recently conducted by Open folio showed that the top 5% wealthiest investors had the least portfolio volatility of all respondents and had below 40% of their portfolios assigned to single stocks. Hence, desist from stock picking and concentrate more on reducing volatility and investing in diverse assets to cushion the overall negative effects of market drops. In case you now have a well-diversified portfolio, remain steady and avoid the tendency to time the market. It may come as a great challenge to many, as it also does even to veteran investors who normally have better access to valuable financial data than most ordinary investors.
     
  2. Aim for a long-term engagement. The recent Brexit crisis and the ongoing US presidential campaign have brought anxiety to investors, causing many to sell off stocks or do various drastic changes in their portfolios. However, it is vital that investors should remain steadfast when such major market events occur. Statistically, those who patiently wait and stick to their guns are often rewarded, while others who do not, miss the opportunities provided by eventual recoveries and risk incurring transaction fees and adverse tax penalties. Only 14% of wealthy investors, according to a U.S Trust survey, gained their biggest investment returns through timing the market. Surprisingly, 86% made great headway by choosing to focus on a long-term buy-and-hold approach. Knee-jerk decisions tend to produce quite a significant undesirable effect on investors' long-term financial objectives; and that includes the building up of a sufficiently stable retirement fund.
     
  3. Stay away from variable annuities. Variable annuities, in general, do not provide secure investments for anyone – with the exception of the cunning advisors who sell them and invariably get fat commissions from such deals. As much as possible, avoid variable annuities which involve high fees and do not provide enough investment alternatives and the desired liquidity. Opt for investments which have lower fees and greater results. And in case you decide to choose a variable annuity, make certain that you collaborate with a financial advisor who is on the level, transparent and accessible. In spite of the Department of Labor's fiduciary rule taking effect in 2017, it is crucial for any investor to be aware of their financial advisor’s fee requirements.
     
  4. Be careful of target-date funds. Although target-date funds may appear as suitable portfolio choices, they do not necessarily fit your risk capacity, investment objectives or the other assets you possess. But as long as If you evaluate target-date funds meticulously, make certain to assess their investment approaches, fees and costs, and how suitably they will merge within your general asset distribution.
     
  5. Be aware of the risks of alternatives. So many investors who look for bigger gains turn to alternatives, such as hedge funds, illiquid real estate investment trusts or private equity. The best option is to first analyze factors -- for instance, your age, earnings capacity, risk tendency and tolerance and investment objectives -- with the assistance of a financial advisor in order to determine if these highly risky investments suit your circumstances in the present or far into the future. In the event you both decide to go ahead and invest in alternatives, bear in mind that generally, high-risk alternatives must cover only from 5% to 15% of a portfolio.

No matter what assets you decide to invest in, whether a large-cap manager, a liquid REIT or an ETF, evaluate the advantages and disadvantages in order to weigh if they match the level of risk you can afford to take and your long-term investment objectives. By doing this, you ascertain the safety and stability of your investment and, in the long run, increase your chances of gaining higher results.

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