By Danielle Andrus, ThinkAdvisor
Millionaires: They’re not so different from the rest of us. In a study of 880 global high-net-worth clients, deVere Group asked respondents to identify the biggest investing mistake millionaires made.
“Mistakes investing can and do occur — it is how they are best avoided, or at least mitigated, that is the key to success,” Nigel Green, founder and chief executive of deVere, said in a statement. “Learning lessons from people, like those we polled, who have overcome these common investment mistakes to go on to accumulate significant wealth in the longer-term is a way to reduce costly errors.”
Green noted that there was little difference between the top five most common mistakes. “This close weighting could suggest that, according to the respondents, all of them are almost equally as significant and costly — and therefore must be avoided,” he said.
Following are millionaires five biggest investing mistakes:
5. Focusing too much on historical returns
Many respondents said they focused more on the past than the future in their investing. “High-net-worth individuals told us that they have in the past been caught out by relying too much on historical returns and not giving enough importance to future expectations,” Green said. “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.”
4. Not reviewing the portfolio regularly
The survey found that many respondents failed to review their portfolio on a regular basis. “This is not surprising as even the best portfolios can go off-target over time,” Green noted. “Investments need to be reviewed and potentially rebalanced at least annually, preferably more often, to ensure they still deserve their place in the portfolio and that they are still on track to reach your long-term financial objectives.”
3. Making emotional decisions
Fully one in five respondents said they made decisions based on emotion instead of fact. “Most decisions in life are emotional to some degree, but making excessively emotional decisions can prove deadly when it comes to investments because they are blighted by prejudices and biases,” according to Green. He pointed to advisors’ advice as an important tool for clients to overcome emotional biases.
2. Investing without a plan
The survey found 22% of millionaires fall into the “all-too-familiar trap of randomly investing, or investing without a structured, robust plan,” according to Green. “Anyone who has an investment plan can expect their portfolio to outperform those without a plan. To my mind, unless you have a sound investment plan you are gambling, not investing.”
1. Not diversifying adequately
Finally, 23% of respondents said failing to adequately diversify their portfolio was their biggest mistake. “As the survey highlights, failure to diversify a portfolio is widely regarded as one of the most common investment pitfalls,” Green said. “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.”
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