High income doesn’t necessarily make someone rich. Building and maintaining wealth is something that comes through careful planning and investing.
Although individuals of all income levels are prone to make investment mistakes, unfortunately, as a high earner, you have more to lose. Additionally, your level of wealth could cause you to be more prone to these specific pitfalls. Follow these tips from the top fee-only financial planners in Salt Lake City, UT, and the surrounding areas, to protect your wealth as an affluent investor.
High Investment Concentration
Many times, affluent investors accumulated their wealth through their business, and that business will make up a large majority of their net worth. The same can be true of company executives with high concentrations of company stock. In these cases, creating diversification outside the business is important; you never want to be in a situation where one thing going wrong will destroy all your personal financial goals.
In these cases, a broadly diversified and highly efficient portfolio makes a great pairing to a highly concentrated and valuable business holding. This setup provides invaluable liquidity, appreciation, and long-term security.
Measuring Performance Incorrectly
In a world of 24/7 news coverage, instant alerts, and CNBC, it is tempting to compare your performance against the DJI (Dow Jones Industrial) Index or S&P 500 Index, by far the two most covered metrics of investment performance. Many investors get frustrated when their returns don’t keep up during bull markets. This represents a huge pitfall; most investors’ portfolios aren’t very comparable to either of those. A majority of investors shouldn’t even try to mirror those indexes, especially the Dow, which only includes 30 companies.
Owning some sort of balanced portfolio that contains a mix of stocks, bonds, and cash in some allocation is the best choice for most investors. This typically results in a portfolio that is less volatile than the all-equity Dow or S&P 500, both upward volatility and downward volatility. The bottom line is that media outlets won’t report on the proper portfolio benchmark for the vast majority of investors. When an investor tries to keep up with the bull market returns of a major index, they often end up overextending themselves relative to the risk appropriate to their situation.
The fix is to understand your portfolio and its allocation. There is an appropriate benchmark for your portfolio; you just need to identify and track it. Only after this step can you properly gauge if your portfolio is doing what you hired it to do.
Believing that More Control = Better Performance
It’s natural to want to frequently check your portfolio and constantly peek in on your investments. However, this leads to frequently adjusting your investment strategy and actively trading in an attempt to “beat the market.”
The most successful investors are the ones who make a plan and stick to it. Working with a qualified professional can be key to this process. Then, stick to your plan. Understand that the worst time to change the plan is when markets are performing poorly. If you work with a professional, don’t hesitate to express your fears and concerns. That process is a big part of why you hired them.
Overconfidence
Because most high earners have been successful in many areas of life, they may assume that they will be successful investors. Of course, a little confidence doesn’t hurt. However, understand that being been successful in your career does not mean that you have the skills and knowledge to beat the market. In fact, most professionals who practice active management don’t end up outperforming their benchmarks.
Most often, affluent investors are successful when they can admit that they don’t know everything and can effectively gather and deploy outside advice. You may just find that working with a financial professional provides you with more time and funds to spend on the things that are most important to you.
To learn more about portfolio management, don’t hesitate to contact TrueNorth Wealth, Salt Lake City’s top financial planning services company!
