Looking for financial advice from the wealthy? More than a quarter of investors with over $1 million in net worth said their worst mistake before working with a financial advisor was . . . drum roll please . . . failing to properly diversify (according to a survey of 652 clients of the financial advisory firm deVere Group in the U.S., U.K., Asia, Africa and Europe).
As Maria Lamanga writes, “These regrets are common and mirror concerns investors with lower net worth have, several financial advisers said. And they don’t indicate a lack of knowledge among investors, they said, but highlight what can happen when habits and emotions get in the way of making good decisions.”
The worst financial mistakes of the wealthy?
27% failed to properly diversify
23% wish they had started investing earlier
20% regret focusing on short-term results
15% were too emotional over investments
8% regret not having enough cash in reserve
Instead of becoming overly self-critical and attempting to get rid of all emotional attachment to money, it’s better to understand those feelings and get ahead of them, said Michael Liersch, the head of behavioral finance for Merrill Lynch BAC, +0.39% wealth management. “When you’ve acknowledged your emotional tendencies as a human being, you can position yourself better for times of turbulence.”
When clients don’t confront their emotional attachments to their money, it can lead to decisions like becoming too attached to a particular stock, even when it’s not performing well, said Jordan Waxman, a managing director and partner of HSW Advisors at HighTower Advisors, a financial services firm. “There’s no reason to fall in love with a stock,” he said. “It doesn’t know you’re in love with it, and it can’t love you back.”
The deVere’s study reveals all-too-common mistakes investors make, experts say. It’s common for investors to think in a binary way about certain asset classes, deciding either to be in or out, which can sometimes lead to a feeling that investments weren’t properly diversified, said Erik Davidson, the chief investment officer for Wells Fargo Private Bank. WFC, -0.19%
Investors at different ages should invest with different levels of risk, he said, because they have distinct goals. Use one’s age as a metric for stock versus non-stock investments — the age should be the percentage not in stocks. A 20-year-old should have about 20% non-stock investments and 80% in stocks; a 50-year-old should be closer to half and half, he said.
That being said, financial goals are more important than age, he said; typically those measures are for retirement savings, but if someone is setting money aside for a wedding in the near future, for example, it makes sense to make a lower-risk investment to make sure the money will be available.
Not investing early enough isn’t reversible, but Davidson tries to show young investors the value of investing as early as possible to take advantage of compounding returns by giving examples — an individual who invests $10,000 per year at a 10% annual return from ages 30 to 36 (a total investment of $70,000) will actually end up with slightly more at age 65 (about $1.5 million) than someone who waited until age 37 to invest the same amount and continues to invest until age 65 (a total investment of $290,000).
Taking full advantage of an employer’s 401(k) match is a good way to maximize retirement savings, even when young investors might have student loans, he added.
To avoid becoming too scared of short-term ups and downs in the market, or current events such as political elections, working with an adviser can help give a more objective perspective, said John Rocco, a financial adviser at Morgan StanleyMS, +1.08% wealth management. Investing can be counter-intuitive, he said, and an objective third-party can point out that it actually may make sense to buy, not sell certain investments when markets are down.
Family members and other people investors trust can also serve as devil’s advocate in those situations and help investors confront some of their biases when investing, Liersch said. “Then you’re not just seeking information that confirms your own views,” he said.
And to make sure clients have enough cash in reserve, Davidson recommends that each client set a number they feel secure with being their net worth — what he calls their “sleep well” number. They can have that amount in cash, and he suggests that the rest be in investments. He recommends keeping three months to a year’s worth of living expenses easily accessible in case of emergency, the same recommendation for lower-net-worth investors.
Of course, financial advisers are giving their recommendations at a cost, so it benefits them to point out mistakes individuals make when investing on their own. It’s certainly possible to manage investments without an adviser, and several new online companies are promising to do so inexpensively.
Either way, all investors should evaluate their investments at least quarterly and do an in-depth “check-up” once a year, Waxman said.