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Cape Town - Failure to properly diversify portfolios is the number one investment mistake made by high net worth investors.
A new international poll carried out by deVere Group has revealed the top investment mistakes high net worth investors made before they sought financial advice.
The number one mistake was failure to properly diversify portfolios (27% of the sample); followed by not having started to invest earlier (23%); focusing on the short-term (20%); being emotional over investments (15%); and not having kept enough cash in reserve (8%).
The sample included 652 deVere clients in the UK, Asia, Africa, the Middle East and the US who have investable assets of more than £1m.
“Ensuring your portfolio is properly diversified is one of the fundamentals of successful investing - yet it is surprising how many people fail to do this,” says deVere group CEO and founder Nigel Green.
“Having a well-diversified portfolio across asset classes, sectors and regions means you are best-placed to mitigate risks and best-placed to take advantage of important opportunities.”
This is of particular relevance to South African investors who, even if they have some diversity in their portfolios, may be looking at diversifying further in a period of increased uncertainty.
One of the most common reasons for investment mistakes, even among high net worth investors who generally have a long-term strategy, is the focus on short-term returns which generally require higher-risk investments and impulsive decisions.
“All too often even experienced investors focus on the short term heavily and there are many disadvantages to this. Typically, a short-term investment strategy involves considerably higher risks, compared to investing over a longer period. Other pitfalls of a short horizon include that investors can often sell a quality investment too early due to over focusing on short-term valuation metrics. Alternatively, they may sell an investment if it drops in the short term, meaning that they would then miss out on it potentially growing steadily in the longer term with increasing returns,” says Green.
“Stock market performance is fairly predictable over the longer term - they usually go up. For this reason, investing in equities is recognised globally as one of the optimum ways to accumulate wealth over long periods. If you put off investing you are likely to miss out on the long-term benefits you could have been gaining.”
While making decisions based on heartfelt emotions and loyalty are admirable traits in most parts of life, this is definitely not the case when it comes to investing, warns Green.
“Investment decisions based on pure emotions, such as fear, greed, or the desire to follow the crowd, amongst others, can be disastrous. Objectivity is key.”
Another common error highlighted by many investors was their failure to keep enough cash in reserve, and Green says it is always advisable to have some cash at the ready and be prepared to use it should a clear trend and/or opportunity present it itself.
While these common mistakes could make it sound like investing is somewhat perilous, not investing is probably more dangerous over the longer term than making some mistakes along the way.
“This is evidenced by the fact that most of the world’s wealthiest people are themselves dedicated investors. It is just a question of being sensible, taking proper advice and, where possible, learning lessons from others to avoid the obvious mistakes. This is why we conducted this poll,” says Green.
“It is almost universally recognised that seeking professional independent financial advice allows you to avoid most of the common mistakes that have been flagged up by high net worth investors in this poll."
