Have you ever wondered how the rich invest their money? You might be surprised to learn that quite often, high-net-worth investors keep things pretty simple. That said, there are certain things that those with wealth often do that give them an edge over your average investor. Here’s a look at five investing habits of the wealthy.
They focus on risk
One thing you often see among high-net-worth investors is a strong focus on risk. This is because they understand the importance of capital preservation.
Ultimately, big investment losses can set you back a long way. For example, lose 50% on a stock and you’ll require a 100% return to break even. Lose 80% on an investment and you’ll need a 400% return to break even.
The average investor doesn’t pay enough attention to capital preservation and it ends up hurting them. High-net-worth investors, however, understand that investing is all about balancing risk with reward.
They diversify
One way that wealthy investors reduce portfolio risk is by diversifying.
Whereas an inexperienced investor might only own a handful of FTSE 100 stocks in their portfolio, your high-net-worth investor is likely to own a wide range of investments including funds, exchange-traded funds (ETFs), individual stocks (large-caps/small-caps), property-based investments, fixed-income securities, and precious metals. They’ll also have broad geographic exposure to reduce country-specific risk.
Diversifying like this gives them a good chance of generating solid returns no matter what financial markets are doing.
They say no… a lot
Another attribute of the rich is that they tend to be very selective about investments.
Whereas an inexperienced investor may see a stock tip in a newspaper and immediately put some money on it in the hope of making a profit, a wealthy investor is more likely to do their research because they understand that not every investment opportunity is worth pursuing.
This is summed up well by Warren Buffett who has said in the past: “The difference between successful people and really successful people is that really successful people say no to almost everything.”
High-net-worth investors also tend to be very patient. They’re happy to sit on the sidelines until an incredible investment opportunity presents itself.
They minimise taxes and fees
Wealthy investors also understand the importance of keeping taxes and fees low.
Taxes can act as a significant drag on investment returns over time, so it’s essential to make use of tax-efficient investment vehicles such as ISAs where capital gains and income are tax-free. Similarly, fees can also reduce investment returns significantly so it’s important to focus on mitigating them.
They seek expert advice
Lastly, the wealthy generally aren’t afraid to seek advice from financial experts.
Whereas inexperienced investors often try to go it alone (and end up making costly mistakes), high-net-worth investors understand that experts can add value.
By seeking advice from experts, the wealthy are able to invest with more confidence.