It’s a paradox of wealth. As your net worth grows and you start thinking investing will finally get easier, you may find the opposite is true. It turns out that choosing the right investments and financial advisors can become more difficult, or at least more confusing, as you amass assets. Here are five reasons why.
1. Instant popularity. With increased net worth comes new attention you may not want, including the relentless sales pitches of brokers, personal bankers, investment advisors and money managers. The more you have, the more options become available to you. But just like on a fifty page wine list, having more choices doesn’t make life easier.
2. The lure of the complicated. When you have money you quickly find there are all sorts of investment options out there that you’ve never heard of, from sophisticated private equity funds and elaborate hedges to tempting “can’t miss” derivatives. In sifting through the options, it is easy, even natural, to be attracted to needlessly complex plans and products. Unfortunately many of these options, if you can even decipher what they are, come with high risk and hefty fees.
3. Affinity for risk. Many successful entrepreneurs attain wealth by embracing business risks that others shun. This risk habit can be a tough one to shake; it follows some investors into the financial markets where it may lead to poor investment choices.
In truth, for most wealthy individuals, capital preservation is a more appropriate goal than trying to generate the highest possible return. Making the mental shift toward a more prudent, less risky strategy is a challenge for many. See our post on this topic.
4. Tax blindness. Let’s face it; what really matters in investing is what’s left after taxes. Ironically, much of the investment industry pretends to ignore this fact.
Because pre-tax returns are generally much higher than after-tax results, it is convenient for sellers of many financial products and services to heavily promote pre-tax returns and ignore after-tax results. This leaves wealthy investors in the dark, or doing the research themselves to fill the tax information gap.
5. Do-it-yourself syndrome. If you are tempted to manage your own portfolio, you’ll have to dodge a long list of mistakes that plague all investors, including poor asset allocation, inadequate diversification, reliance on past performance in selecting investments, insufficient focus on costs and fees, overconfidence in areas of limited experience and the tendency to chase investment fads. While all of these performance problems can be improved through experience, the time and learning commitment necessary to do so is prohibitive for all but the most dedicated investors.
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