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  • Robert Stammers

What Are Billionaire Investors Doing Differently

The number of people on the list of global billionaires only seems to be growing, with a reported 1,826 making the cut this year. Despite recent disturbances in global markets including troubling commodity prices, stock market shocks in China, and a weakened euro, 290 newcomers were added to the ranks in 2015 alone. With a combined aggregate net worth of $7.05 trillion, it’s simplistic to attribute their phenomenal success to being in the right place at the right time. So the question remains ‒ what sets this group apart?

To dig a little deeper, a 2014 report from Wealth-X indicates that more than half of all billionaires listed that year were completely self-made and it’s fair to assume that statistic hasn’t changed remarkably since. Regardless of whether they’ve inherited their money or made their own wealth, superior investment management skills, quality investment advice, or a combination of both are critical to ensuring these people can remain members of the billionaire club over the long term.

In ‘Think and Grow Rich’, one of the best-selling personal finance books of all time, author Napoleon Hill was on a quest to identify common traits that explained the success of the world’s wealthiest. Although the book was written in the post-Depression 1930s, Hill’s lessons are relevant even today. Wishing will not bring riches, says Hill; the use of tried and true principles, attentive planning, and investment best management practices can help investors protect and grow their wealth. Investors continue to refine their approach over time as they gain experience and exposure to the market, but an important part of accumulating and then successfully preserving that wealth is being able to correctly identify and avoid some of the most the common mistakes that plague many retail investors. If any of the following sound familiar to your personal experiences, it may be time to check-in with your investment advisor to discuss your wealth management strategy.

Taking too much, too little, or the wrong risk

Every investor reacts differently to risk. The key here is to have a firm grasp of your own financial and emotional tolerance to risk and to be comfortable with your investment decisions as they pertain to long-term goals. Taking too much risk can lead to large variations in investment performance that may be beyond your financial capacity or out of tune with your true investment personality. On the other hand, taking too little risk can result in returns that fall short of your financial goals. If you’re tempted to make a risky buy or sell decision in reaction to short term market chatter, see below.

Focusing on the wrong performance

Ask yourself – ‘what are my goals as an investor?’ Knee-jerk reactions to speculation or market corrections can lead to unplanned portfolio modifications. This can cause you to divert from your overall strategy and unknowingly sacrifice long term investment success. If you’re concerned about unexpected market swings, first take some time to cut through the noise with the help of your advisor before you make a rash decision. Remember to focus on the big picture – long term performance.

Paying too much in fees and commissions

It’s important to find an advisor who shares your investment philosophy and can be a trusted partner in helping you to achieve your goals. However, it’s equally important to consider the cost of your investment choices and to make these decisions with your eyes wide open. Whether it’s paying too much in advisory fees or investing in a high-cost fund, how you navigate these options can have a significant effect on your earnings over the long term.

Letting emotions get in the way

As a long term investor, important life milestones will likely have an impact on portfolio management. Emotionally driven questions like ‘What will happen with my assets after I die?’or ‘Should I involve my spouse in investment planning?’ can delay or even derail decision-making. A trusted investment advisor will be able to help you work through the immensity of these questions and construct a holistic financial plan that keeps these considerations in mind.

Trying to be a market timing genius

While market timing is possible, it will take more than a few lucky guesses to make this an effective strategy to pursue. Did you know that an investor who was out of the market during the top 10 trading days for the S&P 500 Index from 1993 to 2013 would have achieved a 5.4 per cent annualized return instead of a 9.2 per cent return by staying invested over that same 20-year period? This suggests that time spent in the market is more useful that trying to time the market. Impromptu reactions to sudden dips in the market can result in potentially missed opportunities as the market recovers, and long-term investors are instead better off making consistent contributions to their portfolios.

Robert Stammers (CFA) is the director of investor education at the CFA Institute

To learn more about how retail investors can steer clear of these and other common investor mistakes, you can take a look at CFA Institute’s Tips for Avoiding the Top 20 Investment Mistakes October 2015


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