I’m John Williams, Certified Financial Planner and Senior Advisor at Ironwood Wealth Management and today I want to talk about multi-millionaires.
In a recent study 880 millionaires were asked to identify the biggest investing mistake they made before they decided to get help from a professional.
You know, Multi-Millionaires in many ways are not so different from everybody else. So let’s take a look at the five biggest mistakes they said they made before they decided to get professional help so you can learn from their lessons.
#5. They Focused Too Much On Historical Returns
High-net-worth individuals said they’ve messed up before by relying too much on past returns and not giving enough importance to future expectations.
The past is the past and that means it may not be the same experience moving forward. Now, there’s no way to accurately predict the future, but in our investment practice while we do pay attention to past Performance, we also focus on a few other P words like: People, Process, and Philosophy which may be a better indicator of future outcome.
#4. They Didn’t Review their Portfolio Regularly
This is clearly and important step that can’t be left out. That’s true even when things are going your way. Here’s what I mean, even when your investments are going up, different parts of your portfolio will grow at different rates so that over time you could become over weighted in one area and underweighted in another.
Here at Ironwood Wealth Management we like to rebalance holdings annually or when they’ve moved too far from their target weight.
#3. Making Emotional Decisions
One in five millionaires in the study said they made decisions based on emotions instead of facts.
It’s hard because we’re all born with emotions, but making excessively emotional decisions could prove to be costly when it comes to investments because they might be based on biases or past experience.
I thought it was interesting that the study pointed to an advisors’ advice as an important tool for investors to overcome emotional biases.
#2. Investing Without a Plan
The survey found millionaires fall into the trap of just randomly investing, or investing without a structured plan.
Aside from dumb luck, anyone who has an investment plan should logically expect their portfolio to outperform those who are just winging it in my opinion.
And the #1 Mistake Is Not Diversifying Adequately
23% of multi-millionaires said failing to adequately diversify their portfolio was their biggest mistake.
Keep in mind (and this is very important) diversification only works if your holdings are somewhat dissimilar. If they are all alike, they will tend to act the same.
Please also keep in mind being diversified doesn’t mean you need to have accounts are several places. In fact we’ve seen investors who’ve done that and it usually makes it even more difficult to be properly diversified.
This has been John Williams, with the financial educational blog site Smart Financial Future. Don’t hesitate to let us know if you have any questions. We’ll see you next time.