Do millionaire investors have any investing secrets the rest of us don’t know about?
Not really, suggests a United Kingdom study, which showed they fall into the same share market traps everyday folks do.
Financial advisory firm, deVere Group, surveyed 752 investors around the globe with assets totalling more than 1 million pounds sterling ($1.83 million) each.
The top 3 investing mistakes they admitted to sound very familiar:
1. Relying on historical returns
The top error, which 38% of millionaires confessed to, is choosing their investments based on historical returns.
“It’s interesting to see that for the first time in our surveys of this kind that the number one investment mistake high-net-worth individuals have made is, they say, reliance on guidance from historical returns,” said deVere founder and chief executive, Nigel Green.
“With fundamental shifts in economies and the markets, the often-quoted industry phrase ‘past performance is not a reliable indicator of future performance’ has perhaps never rung more true than it does today.”
Green said the year of COVID-19 has especially emphasised this lesson.
“Wealthy investors are paying attention to how the world has changed dramatically this year and, therefore, investment strategies need to adapt and evolve too in order to reflect the new era we’re living in.”
2. Not seeking out advice
Millionaires also fell prey to their own pride and urge for self-reliance. Not seeking advice was a mistake that 35% of wealthy investors admitted to.
It seems both ordinary and rich people are vulnerable to the Dunning-Kruger effect. This is a psychological tendency for humans to overestimate their own abilities.
Or inversely, human nature means we find it difficult to recognise our own incompetence.
Too many times investors, both amateur and professional, will subconsciously believe they know better than the market.
“It’s encouraging that seeking advice is deemed fundamental to success by millionaires as it shows that DIY investing and not having a regularly reviewed plan is, typically, a path full of costly pitfalls,” said Green.
3. Not diversifying
Lack of diversification was a trap that 21% of millionaires confessed to.
Green was not entirely surprised this one made the top 3.
“Why? Because it is universally regarded as an investor’s best tool to mitigate risks and capitalise on opportunities that arise.”
The fact that even rich folks suffer from these common foibles might frighten some would-be investors.
But Green emphasised that this sort of mindset in itself is the biggest mistake of all.
“Nothing could be further from the truth – not investing is likely to be more dangerous to your wealth over the longer-term,” he said.
“This is shown by the fact that most of the world’s wealthiest people are themselves committed investors.”
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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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