Avoid These Investing Disasters of Wealthy 1%ers

Avoid These Investing Disasters of Wealthy 1%ers



Avoid These Investing Disasters of Wealthy 1%ers

Avoid These Investing Disasters of Wealthy 1%ers

New and Stunning Statistics on High Net Worth Individuals Show How to Avoid the Mistakes they Make.

Raymond Howard was a successful entrepreneur to say the least. He founded a tech company, built it into a powerhouse and then sold it for stock in another company that he subsequently began working for.

At $15 million, Raymond’s investment in this company represented a substantial portion of his overall net worth. But the company’s stock was volatile and had recently been experiencing some troubling swings in value.

It was about this time that Raymond hired a financial advisor to help him organize his affairs. The advisor, aghast that Raymond had so much of his net worth wrapped up this one company’s increasingly unstable stock, advised him to immediately liquidate his position, pay off his $2 million, 8.5% mortgage and invest the remaining capital in a broadly diversified portfolio.

Raymond was emotionally attached to the company and refused to sell his position all at once. Instead, he agreed to “dollar cost average” out of his stock – selling 1/10 of his position for 10 consecutive days. He started this procedure with the stock trading at close to $13 per share.

Not Born this Way: 77% of High Net Worth Investors polled said they came from middle class or lower backgrounds.

On day 14, the advisor called to ask how the sale had gone.

In fact, where it had gone was south. Raymond explained that the first 3 days had gone as planned. But on the 4th day, the stock price fell by $1. Raymond decided to “hold off” until it bumped back up.

But that didn’t happen. Raymond kept waiting but the price kept falling. On day 10, it was at $11.50. On day 11, it was at $9. On day 14, the day of the call, the price had fallen from $7 all the way down to under $1 per share.

The result of his actions was disastrous. Raymond was left with about $3 million he had cashed out of the first 3 days – enough to pay off his mortgage with a little left over for retirement. But he had lost a small fortune through a series of bad decisions, the consequences of which were devastating to his net worth, his family and his future – not to mention the psychological impact it must have had on him.

Raymond Howard is a fictitious name but the story is true. It was shared by Wayne Conners, a portfolio strategist with RetirementAdvisor.com. Wayne was the “advisor” in the story which he shared in Forbes last year.

Myths and Realities of the 1%

You may think yourself too savvy to make a mistake as blatant as the one above, and perhaps you are. But there are several lessons to be taken from it that any of us can learn from.

As a person in your income and/or net worth bracket, you occupy a special place in the annals of society. You’re a member of the much maligned 1%.

Media, politicians, a certain segment of society all like to make themselves feel better by villainizing us.

For people like “Bernie” and his followers – which alarmingly seem to be becoming more numerous in our society – we’re the bad guys and therefore our stuff should be taken away and redistributed to them.

And here I was, after all, thinking we were the good guys.

After all, for the most part, most members of the 1% worked very hard (and smart) to get where they are and value things like family, sacrificing short term pleasure for long term security and giving back to society.

The 1%: I thought we were the good guys.

Statistics back this up.

2016’s “U.S. Trust Insights on Wealth and Worth” survey (US Trust is part of the Global Wealth unit of Bank of America), polled 684 high net worth and ultra-high net worth investors. The results reveal some fascinating insights and shatter some of the common myths about America’s wealthy.

For instance:

  • 77% of those surveyed came from middle class or lower backgrounds – including 19% who grew up poor.
  • Contrary to popular belief, most earned their wealth over time, mostly through income, saving and investing.
  • 86% were either married or in a long-term relationship
  • 81% said investing to reach long term goals is more important than funding current wants and needs
  • Finally, 65% said there is a strong tradition of philanthropy and giving back to society within their family

While not included in the survey, the top 1% of income earners also pay 45.7% of all income tax collected in the United States – the lion’s share of the funds that go towards paving roads, building bridges, conducting medical research and providing defense for everyone. (*CNBC, as per 2014 tax year)

…the top 1% of income earners also pay 45.7% of all income tax collected in the United States.

That doesn’t sound like the “evil 1%” portrayed in the media and by certain political groups. It sounds more like people that worked hard, played by the rules, made good decisions and contribute greatly to society.

Investing Wisdom from Fellow 1%ers

If you belong to this group, which if you are reading this newsletter you likely do, you deserve a pat on the back and a “thank you” – not scorn – from the rest of society.

But 1%ers also exhibit some fined tuned investment savvy and instincts, according to the US Trust survey. For instance:

  1. We make tax savvy investments: 55% said they investment decisions that factor in potential tax implications are better than pursuing only higher returns.
  2. We invest in tangible assets: Nearly half of the HNW investors surveyed put their money into tangible assets (read not stocks) that can produce income.
  3. We make Strategic use of leverage: Nearly two thirds of respondents said they use credit (leverage) as a means to strategically build their wealth. 4 in 5 say they know when and how to use credit as a financial advantage.

Protecting Wealth and Avoiding Investment Disasters

But HNW investors, like everyone else, are not perfect. We have blind spots.

Nearly half of the HNW investors surveyed put their money into tangible assets (read not stocks) that can produce income.

In 2016, the deVere Group, one of the leading independent financial advisory organizations in the world, published an international poll of high net worth investors that asked about the top investing mistakes they had made. The number 1 mistake cited by these HNW investors?

Failure to appropriately diversify their portfolio

Other notables included

  1. Focusing too much on the short term and
  2. being emotional over investments.

Taylor R. Schulte, a CFP with DefineFinancial.com might have another to add: Trying to time the market.

In a recent contribution to Forbes, Mr Schulte shared a story from March 2009 of a client that called him to say that his wife was going to leave him if he didn’t liquidate their entire investment and retirement portfolios. This is of course, when the stock market was in the depths of despair – the heart of the financial collapse. Ultimately, their request was fulfilled – causing this poor gentleman to not only lose a substantial portion of his net worth, but miss out on the greatest bull market in history.

Mr. Schulte’s story hit a personal chord with me as well. My entire shift to selling options as a core portfolio strategy evolved from a personal frustration with trying to time the markets back in the 1980s. Trying to time markets (which can move randomly in the short term) was hair-pulling-out maddening…and ultimately futile.

Mistakes the Ultra-Wealthy Don’t Make

Finally, in an excellent piece from Investopedia.com, Evan Tarver shares the 6 Investing Mistakes That the Ultra Wealthy Don’t Make. Mr. Tarver defines ultra-wealthy as investors with net worths of $30 MM+ and comes at it from a different angle. He says that they don’t make these mistakes – implying that the “just regular” wealthy do.

Nonetheless, in addition to some of the standards that were congruent with the deVere study, Mr. Tarver’s study also revealed a notable mistake NOT made by the ultra-wealthy. That mistake?

Choosing to Invest Only in Non-Physical Assets.

In Mr. Tarver’s words – “When people think of investing strategies, stocks and bonds normally come to mind. Whether this is due to higher liquidity or a smaller price for entry, it doesn’t mean that these types of investments are always best. Instead, UHNWIs understand the value of physical assets, and they allocate their money accordingly….While it’s important to invest in these physical assets, they often scare away smaller investors….However, according to the ultra-wealthy, ownership …especially ones that are uncorrelated with the market, is beneficial to any investment portfolio.“

Tarver’s study also revealed a notable mistake NOT made by the ultra-wealthy. That mistake? Choosing to Invest Only in Non-Physical Assets.

The Conclusion

Nigel Green of the deVere Group who conducted the HNW research cited earlier, sums it up best in his comments on the study:

“All this could make it sound like investing is somewhat perilous. Yet nothing could be further from the truth – not investing is probably more dangerous over the longer term…It is just a question of being sensible, taking proper advice and where possible, learning lessons from others to avoid the obvious mistakes….Ensuring your portfolio is properly diversified is one of the fundamentals of successful investing. Yet it is surprising how many people fail to do this. Having a well-diversified portfolio across asset classes, sectors and regions means you are best placed to mitigate risk and best placed to take advantage of important opportunities.”

Lessons Learned

The US Trust Study indicated one final point that you may find fascinating. While 89% said they made their biggest investment gains with traditional (stock and bond) investments, a full 83% said they did it by taking small wins instead of big investment risks. More importantly, this same group consequently said that their use of more sophisticated investments grows as their wealth grows. This almost surely a sign that as wealth grows, the priority becomes protecting it by diversifying out across different potential avenues of growth – rather than a sustained and never ending “all in” assault on the stock market.

Regardless of your level of net worth or investment savvy, learning from the experiences of our peers is a way to avoid mistakes without making them ourselves.

Mr. Howard violated just about all of the mistakes and lessons cited here. And while your own portfolio may not be as vulnerable as Mr. Howard’s, even minor mistakes can have an outsized impact on overall wealth and security.

As we swing into the second quarter of 2017, giving your asset allocation a quarterly checkup can be a good idea. Problem areas, allocations causing discomfort or areas of vulnerability will almost certainly trace back to one of the mistakes or lessons mentioned in these studies.

A brand-new quarter can be a great time to make the right adjustments.

James Cordier is president and head trader of OptionSellers.com, a wealth management firm specializing in option selling portfolios for high net worth investors.

  1. Dmitry Y Says:
    April 20, 2017 at 2:22 pm

    Interesting and informative. Many many thanks to Options Sellers team for their work, website and education to public!

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