Just because you're sitting on a pile of money doesn't mean that you know how to manage it. It may surprise many that even millionaires blunder when it comes to preserving their wealth.
According to the deVere Group, a group of independent financial advisers, high net-worth clients frequently make the same mistakes that less well-heeled people make.
* Failure to Diversify. This mistake was made by nearly everyone, although they may not even know it. For years, many thought that their home was their primary investment; the collapse of 2008 showed what a bad idea that was.
Others invested exclusively in their company's stock or "the next" Microsoft. Diversification means having vehicles that move in different directions. That means a mix of stocks, bonds, real estate, commodities, collectibles and business interests. If you're not able to diversify that broadly, try a balanced mutual fund (stocks and bonds) and real estate.
“As the survey highlights, failure to diversify a portfolio is widely regarded as one of the most common investment pitfalls. Spreading your money around is a vital tool to manage risk. However, it must be used correctly. Diversification will only add real value if the new asset has a different risk profile."
* Investing without a Plan. Even if you're only investing $100 a month in a retirement program, you need a plan. When do you want to retire? How much will you need to match your desired lifestyle? What kind of rate of return do you need to achieve your goal? When do you plan to take Social Security?
The most important part of a plan is an "investment policy statement." Write down your goals and when you want to achieve them. Note how much risk you want to take in terms of a pie chart, i.e., percentage invested in stocks, bonds, real estate, etc. This will help you visualize your plan.
Above all, run some numbers. You needn't crunch the numbers cold. Use retirement calculators.
There's also the matter of Social Security: When you take it will determine your lifetime benefit. If you wait until 70, you'll reap the highest monthly payment.
* Making Emotional Decisions. It always surprises me how most people invest. They have a "gut" feeling about a stock. They are sure the stock market will go down. They think their company is the best in the world. These are all lies we tell ourselves.
The best way to strip emotion from investing is to craft a rational plan that matches your risk tolerance. Then stick to it.
* Failing to Review a Portfolio. Creating a portfolio is not like riding a bike. You don't do it once and think you can do it the same way the rest of your life.
Look at your portfolio once a year. Rebalance it if it veers from your investment policy statement. If you fiddle with it more than that, you're likely to make some bad decisions.
"The future investment situation is likely to be different from time-aged averages. Past averages may have little bearing on the current environment and therefore the actual returns you receive.”
* Focusing on Past Returns. You can't predict the coming year based on last year's returns. But most people refuse to believe that. They pick stocks and mutual funds using that erroneous perspective.
Nobel Prize Winner Eugene Fama, who won last year for his work in financial economics, says that to get a clear picture of how a stock or asset performs, you would need at least 35 years of past returns.
Most of us don't look back more than a day or two. He says pick low-cost index funds that represent the bulk of the stock and bond markets, adjust the allocation according to your age and risk level -- and leave it alone.
If you can learn from the mistakes of millionaires -- even those who might not live next door -- you can improve your portfolio's returns. The rules are surprisingly simple.
John F. Wasik is a speaker, writer, consultant and author of 14 books, including Keynes's Way to Wealth: Timeless Investment Lessons from the Great Economist.
