EP 43 | TOP 3 MISTAKES OF HNW INVESTORS

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Hosted by
ANDREW LANOIE

On this episode of The Impatient Investor, Andrew talks about the three top mistakes high net worth investors make that can quickly wipe out what sometimes took multiple generations to build up. Enjoy!

“Nobody is immune from financial mistakes, including the wealthy. 70% of wealthy families lose their wealth by the second generation and a stunning 90% by the third.”

FULL TRANSCRIPTION:

Being rich doesn’t guarantee you’ll remain rich. And just because you’re successful in one field, doesn’t mean you’ll be successful in another. Making money and preserving it requires avoiding financial mistakes that will drain your resources.

Nobody is immune from financial mistakes, including the wealthy. 70% of wealthy families lose their wealth by the second generation and a stunning 90% by the third. And that’s according to the Williams group, wealth consultancy. Building wealth or inheriting wealth is very different from preserving wealth. Here are three top mistakes high net worth investors make that can wipe out in one generation what sometimes took multiple generations to build up.

Number one, arrogance, whether through inheritance or growing a business through hard work, one mistake, many high-net-worth investors make is thinking they’re Bulletproof, that they can never lose all their money. For wealthier heirs, many think that what worked for their parents should work for them, right? The problem is their parents may have made money in an industry that once thrived but is now on the decline. Refusing to think outside of the box has been the downfall of many fortunes.

For those who made money building and growing their businesses, many think it’s a foregone conclusion that they will be successful in investing. Now I’m not downplaying the hard work many of these business owners put in to be successful, but the skills, knowledge, and expertise use to build a successful business in one industry doesn’t necessarily translate to successful investing in another industry.

The problem with arrogance is that it often makes investors put money in ventures they would never make with a level head. The high-net-worth investors who are successful at preserving their wealth are willing to put their pride aside to defer to experts in their field. That’s why they prefer investing in private markets. Private companies are more transparent, and their principles are accessible and make themselves open to answering questions from potential investors on a variety of subjects, including their expertise, track record, the company’s business plan, state of the market and competition among other things. Although open to deferring to the expertise of others, successful high net worth investors, won’t invest with anyone. They’re only willing to part with their money. Once their investment objectives align with those of the company and its principles.

Number two, short-sightedness. Another big mistake high net worth investor make is taking a short-term approach to investing, which attracts them to the liquidity of the public markets where stocks can be bought and sold at the swipe of a screen. The problem with the public markets is that you’re in a pool of other investors with a short attention span. Liquidity is a wealth killer. Let me say this again. Liquidity is a wealth killer. Investing with short-term windows relies on timing to beat the market, buying and selling at the right times to maximize profits, on the upswing and minimizing losses on the downswing.

It’s so hard to beat the market. Liquidity leads to volatility and unpredictability as investors jump from one stock to another, depending on their moods. And what’s trending on the financial news, the internet, and of course, social media. Timing the market is a fool’s errand. As very few investors have consistently beaten the markets. 92% of hedge fund managers, financial advisors, and other professional managers fail to beat the market. So, what chance the individual investors have? This is not a recipe for building wealth. It’s a recipe for squandering it.

Successful high-net-worth investors invest for the long-term. They take their emotions and the emotions of the investing public out of their investment decisions. They put their money in long-term investments that have historically performed well, it’s boring, but it works. Long lock-up periods and private investments eliminate the possibility of massive sell-offs that erode wealth as seen in the public markets.

Number three, ignoring passive income. Many high-net-worth investors fail to recognize the value of passive income and therefore ignore valuable wealth preserving assets. Passive income is vital for high-net-worth investors because they will deplete their wealth through lavish spending and living expenses, unless they find a way to replenish that wealth. If they don’t, they will eventually run out of money.

Successful high net worth investors put their money in assets with intrinsic value, productive assets that cashflow and appreciate. Common stocks have no intrinsic value. They are not productive and derive their value purely from what investors are willing to pay for them. Stocks cannot be relied on to sustain a certain standard of living in a downturn. The overriding factor in the high-net-worth investment analysis is whether an asset can stand on its own no matter what the rest of the market is doing. And no matter what anybody else is willing to pay for it.

Will a particular business continue to produce goods people want in a recession and will a property continue to generate rents in a downturn, investing in an asset that generates passive income, even in a downturn, preserves wealth, even when other income sources dry up? Making and having money is very different than preserving it. The high-net-worth investors who are successful in preserving their wealth, avoid the three biggest mistakes other high net worth investors make by remembering to be humble, invest for the long-term, and seekinf passive income. If you’re interested in learning more, go to www.stoptradinghours.com.

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Episode 43