While many people believe that the rich follow a different set of investing rules to the rest of us, you’d probably be surprised to learn that many of the strategies wealthy investors follow are just basic rules of investing such as diversifying properly and avoiding excessive risk.
Here are five strategies that the rich generally follow to grow and preserve their wealth.
Risk management
High on the agenda for most high net worth investors is a strong focus on risk management. Whereas novice investors dream of generating huge returns from the share market and often take excessive risks to achieve these returns, wealthy investors focus on downside risk with preservation of capital their most important priority. It’s often said that the most important rule of investing is not to lose money, and with the rich already having generated their wealth, their focus is likely to be on preserving it and avoiding big losses.
Diversification
One of the simplest ways that the rich manage risk is through portfolio diversification. Whereas an inexperienced investor might own just a handful of different stocks, the wealthy investor is more likely to own a fully diversified portfolio that includes multiple asset classes such as equities, fixed income, property, cash and possibly alternative investments such as commodities and hedge funds. Furthermore, the asset classes themselves are likely to be fully diversified to avoid country, sector or company-specific risk.
Portfolios are also likely to be rebalanced on a regular basis as another form of risk management.
Managed Funds/ETFs
One way that wealthy investors achieve such diversification is through the use of managed funds and exchange traded funds (ETFs). By investing in a basket of securities, investors can significantly increase their diversification or add exposure to a certain area of the market, without running the risk of a single underperforming stock ruining the portfolio’s returns.
High net worth investors will keep an eye on fees however, to ensure that their wealth isn’t eroded by fees over time.
Not always fully invested
Another thing that separates the rich from the masses is the need to be fully invested, and this relates back to the focus on risk and reward. Novice investors often focus purely on the reward side of the equation and therefore believe that they must be fully invested at all times to maximise their rewards going forward. On the other hand, the rich already have their wealth and therefore can pick and choose what they invest in, having no need to be fully invested at all times. For this reason, they’ll often stay on the sidelines until they see a compelling investment opportunity. This is a wise strategy even for those of us who aren’t rich and one that I’ve followed myself in recent years. There’s absolutely nothing wrong with having cash on the sidelines, waiting for an appealing investment opportunity to arise.
Seeking advice
Lastly, the rich aren’t afraid to seek advice from professionals. Whereas many inexperienced investors attempt to go it alone, the rich seek help from experts in the field, whether that’s advice on minimising tax or advice regarding the best stocks to own for the long term.
