Managing an investment portfolio requires time, dedication, an objective viewpoint, and years of training and experience. However, many high net worth individuals often assume they can do so successfully, taking on the task while failing to recognize just how great of a responsibility it really is.
For wealthy families, bad decisions, even if they seem minor at the moment, have the ability to become magnified over time. Decisions made by those managing their own wealth are often clouded; many of them are made based on emotions, misunderstandings, and lack of experience (unless investing is an area of expertise).
Here are some of the most common investing mistakes affluent individuals make and how you can avoid them:
You think you can handle it on your own.
Incredible financial success often leads affluent individuals to believe they can excel in most other areas. As a result, many underestimate the complexities of investment portfolios and dive right into a world they don’t fully understand. However, just as the owner of a multimillion-dollar company needs the right staff to properly manage and run his/her business, you need the right guidance to appropriately manage your portfolio.
You create a Single Family Office (SFO).
There are plenty of benefits to establishing an SFO, a private company to run the investments and trusts of the your family. However, it’s much more costly and requires a lot more time to set up and manage than most people assume. The biggest problem? High staff turnover rates. Many people find it difficult to retain advisors and end up having to devote more of their own time into managing, implementing, and following up on investment opportunities. While it seems ideal to have trustworthy family members or friends take charge of your finances, it can become extremely difficult to balance and separate the needs (and wants) of your family and your investment portfolio.
You give a close friend or relative all control over your investment portfolio.
While a Single Family Office provides an organized structure, some people simply hand over all responsibility to a trusted friend or family member. However, more often than not, all this achieves is a strained relationship and loss of returns. You need the best of the best, and someone who is an expert in the investment industry. One good question to ask yourself is, Would you let this person run your multi-million dollar company? If not, then it’s time to find a trusted advisor.
You let current events influence your financial decisions
One of the most basic and common mistakes investors make is allowing the fluctuating stock market climate to influence their investment decisions. For example, if the markets start declining, some may be urged to make less risky moves and switch out of equities to more conservative vehicles. However, this might cause them to have a lower annual return, which may not generate the growth needed to meet their future goals. An experienced investor knows how to weight current events against historical trends. It’s also best to adhere to an investment strategy and rebalance on a regular basis to make sure your portfolio stays within the limits of established investment parameters.