We’d all like to be wealthy, but unfortunately, many investors make fundamental mistakes that can impact their ability to grow their wealth. Mistakes that wealthy people know to avoid. The good news is they’re not rocket science, and we can all learn from them. We discuss five of the main ones below.
1. They remember to diversify
Wealthy people have always embraced the first rule of investing: diversification. Forgetting to do so can raise your risk profile and impact your investment returns. Today’s world offers a myriad of opportunities to invest in varying geographic locations, intangible and tangible assets, listed or private companies, fine arts or collectable wines and much more besides. By investing in a broad spectrum of assets that all grow at different rates and stages, and in varying conditions, the wealthy minimise risk across their investment portfolios.
We don’t all have the good fortune and insight to invest directly in all these options, but unit trusts make diversification accessible to everyone. They allow investors to pool their investments into funds that are already well diversified across asset classes, as well as various instruments within an asset class. In other words, unit trusts handle diversification on your behalf.
2. The wealthy don’t think they can time the market
Wealthy investors aren’t gamblers and don’t entertain illusions of being able to ‘time the market’, by buying in before prices rise and then getting out before prices fall. While this tactic may work once or twice by accident, it’s bound to end in heartache in the long run. Even financial analysts and fund managers are unable to accurately predict these market shifts, since no two business cycles are the same.
3. They don’t get emotional about their investments
The wealthy aren’t emotional about their investment choices, and they don’t bother to keep up with the Joneses. They often embrace frugality, remain optimistic and invest spare money to compound their investment returns. To learn a bit more about the “miracle of compounding” as it’s called, read our article How to Compound Your Wealth.
The wealthy tend to divide, rather than share, roles and responsibilities. They delegate and embrace various professional disciplines including investment specialists who have better insight than they do. If you haven’t already done so, it’s time you started disregarding your feelings and embracing professional financial planning advice instead. Or as Warren Buffett put it, “It’s better to hang out with people better than you. Pick out associates whose knowledge is superior to yours and drift in that direction”.
4. The wealthy don’t panic
As a corollary to point three, even if their portfolios lose substantial value in a market downturn, the wealthy don’t panic. This could be because they realise the losses are only temporary (as long as they don’t sell their investments), since over the longer term markets rebound and produce solid returns. Or it could be because they have a financial adviser to prevent them from panic selling and locking in the losses. In either case, they don’t make the mistake of selling low and buying high – which destroys wealth. This is a common investment pitfall, since many investors are motivated by fear and greed.
The wealthy understand the importance of having a long-term view and keeping your eye on the prize of reaching their investment goals within a realistic timeframe. It will never be an easy process, thanks to the vagaries of financial markets. The wealthy understand this.
5. They always rebalance their investment portfolios
Rebalancing your investments is the process of readjusting the overall asset allocation in your portfolio to maintain your original investment objectives. It’s necessary to do this periodically since investment values move over time, giving better-performing assets a higher weighting. Rebalancing usually entails buying and selling varying proportions of unit trusts and other assets. It protects your gains (since you sell higher-performing securities to lock in the gains).
If you’ve invested in a portfolio of unit trusts, make it your business to remain in touch with your financial adviser about rebalancing your portfolio at least annually to ensure that you remain on track to achieve your goals.
If you’d like to understand rebalancing a bit better, you can read our article Long Term Investing: A Balancing Act.
A final word
Making money is one thing, but keeping it is an entirely different matter. By avoiding these five common investment pitfalls – year in and year out – your nest egg will grow, and over time you are more likely to end up wealthy yourself.