The ultra wealthy, known as ultra high-net-worth individuals (UHNWIs), make up a group of people who have net worths of at least $30 million. The net worth of these individuals consists of shares in private and public companies, real estate investments and personal investments, such as art, airplanes and cars.
When people with lower net worths look at these UHNWIs, many of them believe that the key to becoming ultra wealthy lies in some sort of secret investing strategy. However, this isn't normally the case. Instead, UHNWIs understand the basics of having their money work for them as well as understand how to take calculated risks.
In the words of Warren Buffet, the number-one investing rule is to not lose money. UHNWIs aren't mystics, and they don't harbor deep investing secrets. Instead, they know what simple investing mistakes to avoid. In fact, many of these mistakes are common knowledge, even among investors who are not particularly wealthy.
While many investors would rather stick to investing in developed countries in the Western world, UHNWIs have been setting their sights on frontier and emerging markets. Some of the top countries that the ultra-wealthy are investing in include Indonesia, Chile and Singapore. Of course, individual investors should do their own research on emerging markets and decide whether they fit into their investment portfolios and their overall investment strategies.
Instead, UHNWIs understand the value of physical assets, and they allocate their money accordingly. Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold and even artwork. While it's important to invest in these physical assets, they often scare away smaller investors because of the lack of liquidity and the higher investment price point.
However, according to the ultra-wealthy, ownership in illiquid assets, especially ones that are uncorrelated with the market, is beneficial to any investment portfolio. These assets aren't susceptible to market swings, and they pay off over the long-term. For example, Yale's endowment fund has implemented a strategy that includes uncorrelated physical assets, and it has returned an average of 10.1% per year over the last decade.
Mitt Romney was able to grow his individual retirement account (IRA) to over $100 million by investing in private equity. Additionally, top endowments, such as those run at Yale and Stanford, use private equity investments to generate high returns and add to the funds' diversification.
The ultra-wealthy know this, and they establish personal investment goals and long-term investment strategies prior to making investment decisions. UHNWIs envision where they want to be in five, 10 or 20 years and beyond, and they adhere to an investment strategy that will get them there. Instead of trying to chase the competition or becoming scared from the inevitable economic downturn, they stay the course and stick to their guns.
Further, the ultra-wealthy are very good at not comparing their wealth to other individuals. This is a trap that many non-wealthy people fall into. UHNWIs stave off the desire to purchase a Lexus just because their neighbors are buying Lexuses. Instead, they invest the money they have to compound their investment returns. Then, when they've reached their desired level of wealth, they can cash out and buy the toys they want.
For the ultra-wealthy, rebalancing is a necessity. They can undertake this rebalancing monthly, weekly or even daily, but all UHNWIs rebalance their portfolios on a regular basis. For the people who don't have the time to rebalance or the money to pay someone to do it, it's possible to set rebalancing parameters with investment firms based on asset prices.
This way, the ultra-wealthy can focus on increasing their cash inflows as well as reducing their cash outflows, increasing their overall wealth. While it might not be common to think of the ultra-wealthy as savers, UHNWIs know that living below their means from day one will allow them to achieve their desired level of wealth in a shorter amount of time.
In the words of Warren Buffet, the number-one investing rule is to not lose money. UHNWIs aren't mystics, and they don't harbor deep investing secrets. Instead, they know what simple investing mistakes to avoid. In fact, many of these mistakes are common knowledge, even among investors who are not particularly wealthy.
1. Deciding to Invest Only in the US and the EU
While developed countries such as the United States and those within the European Union are thought to offer the most investment security, this isn't necessarily the case. With the recent high risk in the EU, thanks in large part to Greece's bad debt woes, UHNWIs are currently looking beyond the U.S. and the EU for investments.While many investors would rather stick to investing in developed countries in the Western world, UHNWIs have been setting their sights on frontier and emerging markets. Some of the top countries that the ultra-wealthy are investing in include Indonesia, Chile and Singapore. Of course, individual investors should do their own research on emerging markets and decide whether they fit into their investment portfolios and their overall investment strategies.
2. Choosing to Invest Only in Non-Physical Assets
When people think of investing and 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 the best.Instead, UHNWIs understand the value of physical assets, and they allocate their money accordingly. Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold and even artwork. While it's important to invest in these physical assets, they often scare away smaller investors because of the lack of liquidity and the higher investment price point.
However, according to the ultra-wealthy, ownership in illiquid assets, especially ones that are uncorrelated with the market, is beneficial to any investment portfolio. These assets aren't susceptible to market swings, and they pay off over the long-term. For example, Yale's endowment fund has implemented a strategy that includes uncorrelated physical assets, and it has returned an average of 10.1% per year over the last decade.
3. Allocating 100% of Investments to the Public Markets
UHNWIs understand that real wealth is generated in the private markets rather than the public or common markets. The ultra-wealthy may gain a lot of their initial wealth from private businesses, often through direct business ownership or as an angel investor in private equity.Mitt Romney was able to grow his individual retirement account (IRA) to over $100 million by investing in private equity. Additionally, top endowments, such as those run at Yale and Stanford, use private equity investments to generate high returns and add to the funds' diversification.
4. Keeping up With the Joneses
Many smaller investors are constantly looking at what their peers are doing, and they try to match or beat their investment strategies. However, not getting caught up in this type of competition is critical to building personal wealth.The ultra-wealthy know this, and they establish personal investment goals and long-term investment strategies prior to making investment decisions. UHNWIs envision where they want to be in five, 10 or 20 years and beyond, and they adhere to an investment strategy that will get them there. Instead of trying to chase the competition or becoming scared from the inevitable economic downturn, they stay the course and stick to their guns.
Further, the ultra-wealthy are very good at not comparing their wealth to other individuals. This is a trap that many non-wealthy people fall into. UHNWIs stave off the desire to purchase a Lexus just because their neighbors are buying Lexuses. Instead, they invest the money they have to compound their investment returns. Then, when they've reached their desired level of wealth, they can cash out and buy the toys they want.
5. Failing to Rebalance a Personal Portfolio
While many people might not be 100% financially literate, everyone should understand the practice of rebalancing their portfolios. Through consistent rebalancing, investors can ensure that their portfolios remain adequately diversified and proportionally allocated. However, even if some investors have specific allocation goals, they often do not keep up with rebalancing, allowing their portfolios to skew too far one way or the other.For the ultra-wealthy, rebalancing is a necessity. They can undertake this rebalancing monthly, weekly or even daily, but all UHNWIs rebalance their portfolios on a regular basis. For the people who don't have the time to rebalance or the money to pay someone to do it, it's possible to set rebalancing parameters with investment firms based on asset prices.
6. Omitting a Savings Strategy From a Financial Plan
Investing is the number-one way to become ultra-wealthy, but many people forget about the importance of a savings strategy. UHNWIs, on the other hand, understand that a financial plan is a dual strategy: invest wisely and save wisely.This way, the ultra-wealthy can focus on increasing their cash inflows as well as reducing their cash outflows, increasing their overall wealth. While it might not be common to think of the ultra-wealthy as savers, UHNWIs know that living below their means from day one will allow them to achieve their desired level of wealth in a shorter amount of time.
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