I'm a Finance Expert: 4 Investing Errors Even My Millionaire Clients Have Made
Even millionaires can make investing mistakes that create expensive problems.
Some have brushed off professional advice, chased big returns or stayed with familiar investments that were not pulling their weight.
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Finance experts shared four errors their wealthy clients have made and what everyday investors can learn before putting their own money on the line.
Rejecting Sound Financial Advice
Aviva Pinto, managing director at Wealthspire Advisors, described a retired client in his late 60s who inherited $10 million but rejected her firm’s guidance on diversification, principal protection, liquidity and gradual growth.
Pinto said the client was advised not to put more than 20% of his assets into illiquid investments, but he put much of the inheritance into private equity.
“It has now been over eight years,” Pinto said. “None of the investments have liquidity and of the ones that are still in business, none of them appear to have an exit strategy any time soon.”
Chasing Unrealistic Returns
Pinto said the client wasn’t financially sophisticated but thought he knew more than he did. He believed private equity was a sure thing that should earn 20% a year.
That confidence shaped how he handled the inheritance.
He increased his spending because he believed he was now rich, then landed in a major cash crunch. The client was forced to use margin from his original, smaller portfolio for daily living expenses. “His belief that PE (private equity) was a sure thing that could produce better returns led him to this situation,” Pinto said. “There is little left of his original portfolio and he is now selling off other assets (including property).”
Mistaking Familiar for Safe
Residential real estate can feel safe, especially for investors who first built wealth through homeownership.
But that familiarity can also keep money tied up in an underperforming investment.
Shavon Jones, Esq., managing director of The Rural Fund, described millionaire clients who kept $500,000 in equity tied up in rental properties because selling felt too risky.
The properties generated $8,000 a month in gross revenue but only $2,500 a month after operating costs and before income taxes.
“Residential real estate is only a good play for investors with 50 or more units,” Jones said. “That way the risk of nonpayment is spread out and the income stream is sufficient to quit your day job.”
Ignoring After-Tax Returns
Failing to consider the after-tax return on an investment is another mistake Jones said she sees millionaires make.
“Taxes are the largest investment expense,” Jones said. “They eat away about 36% of investor returns, according to a Wall Street Journal study.”
Jones advised investors to compare the full picture before deciding, including projected returns, taxes, exit strategy and investment fees.
Looking at those numbers side by side can reveal whether an investment’s headline return is actually worth the cost.
The Bottom Line
The investment that feels most exciting, safest or most familiar isn’t automatically the one that works best.
Before moving money, financial experts say everyday investors should get a second set of eyes, put the expected return next to the tax bill and exit plan and make sure the money will still be available when life needs it.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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