For ultra-high net worth families, retirement offers the prospect of great reward for your years of hard work. This is the time to enjoy the fruits of your labor and start doing those things you never had time for while burdened with work and other obligations.
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Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
But there’s one thing that can prevent you from enjoying that retirement: Making big mistakes with your portfolio in the years leading up to and entering into your retirement.
Here are 10 retirement mistakes ultra-high net worth investors must avoid making at all costs if they want their latter years to be everything they’ve longed for.
Table of Contents
- Mistake #1: Being Too Conservative
- Mistake #2: Failing to Properly Diversify
- Mistake #3: Putting All Your Eggs in One Basket
- Mistake #4: Losing Money on Costs and Fees
- Mistake #5: Chasing ‘Hot’ Stocks and 5-Star Funds
- Mistake #6: Buying Annuities
- Mistake #7: Mishandling Your Withdrawals in Retirement
- Mistake #8: Ignoring Inflation
- Mistake #9: Getting Scammed by Having an Advisor Who Is Also the Account Custodian
- Mistake #10: Trying to Time the Market
- A Better Way to Invest in Retirement
- Don’t Want to Risk Waiting Any Longer?
Mistake #1: Being Too Conservative
Earning 2% per year but not losing any money just isn’t going to work. Sure, you could park all your money in CDs, and you won’t ever have to worry about market crashes and black swan events like the coronavirus or the Great Recession, but you’ll also miss out on all the big market gains too, which sometimes sustain themselves for many years in a row.
When the market does well, earning double digit increases year after year, investing too conservatively will cause you to miss out on millions in potential gains.
You may end up living 35 years or more in retirement. Overly conservative or fearful investing isn’t going to give you the life you want.
Mistake #2: Failing to Properly Diversify
You might think that owning stock in 30 different companies puts you in a safely diversified position. But if all those companies are in similar industries, you’re basically investing in just one company. When the tech industry crashed in 2000, all the tech stocks got battered. When oil prices crash, all the oil companies lose value. None escape.
In the same way, investing in multiple mutual funds that use similar investment strategies is not true diversification. They will all perform similarly, going up together and going down together.
The lack of effective asset allocation – which is far more important than diversification – is one of the biggest retirement mistakes made by ultra-high net worth investors.
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Mistake #3: Putting All Your Eggs in One Basket
Lots of high net worth workers receive stock options from their companies. Because they work at these companies and believe in their upside so strongly, these workers tend to hold on to those options a long time, resistant to selling them. Stock options from just one or two companies often make up an outsized portion of ultra-high net worth portfolios.
This puts you in extreme risk.
If the company you’re betting on collapses, which has happened over and over throughout history, your portfolio value can be decimated in a matter of days or weeks. We’ve seen people lose over 80% of their money because of retirement mistakes like this.
Tyco’s stock went from $117 per share down to $25 in just six months, a 78.6% drop. Imagine if you held 80% of your money in that stock because you worked there and they gave you stock options as compensation. When companies implode, their shareholders never recover their losses.
The more recent example of WeWork’s failed IPO serves as another example. Some investors bet big on new companies they think will perform highly. More often than not, angel investment and venture capital opportunities produce middling or poor returns.
Mistake #4: Losing Money on Costs and Fees
If you have $10 million invested, how much will you lose over the next 20 years if you pay 1.5% in costs, compared to 0.5%? That little 1% difference will add up to millions over twenty years.
Mistake #5: Chasing ‘Hot’ Stocks and 5-Star Funds
When a stock is labeled as “hot”, that only tells you one thing: It would have been a good buy a few years back. By the time it’s already hot, that usually means most of the gains you could have earned have already accumulated.
Are there exceptions to this? There are exceptions to everything. Will you be the one lucky person to know when you’ve got an exception? Don’t bet your retirement on it.
5-star funds work in much the same way. Funds given 5-star ratings have only one way to go – down. If you base your retirement security on jumping on bandwagons like these, you will almost certainly reap middling performance, at best.
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Mistake #6: Buying Annuities
Annuities are very hard to get out of if you later decide it wasn’t the right deal for you. They charge high surrender fees and often require you to jump through a bunch of hoops. But annuities can harm your ultra-high net worth investment performance in other ways too.
Basically, they are set up to make the company money no matter what happens to you – including death.
They charge high ongoing fees as well as if you choose to surrender the annuity. Either way, company makes money. They tack on other expenses if certain scenarios take place, but it’s often hard to understand because the contracts are becoming increasingly complex.
Company makes money. They make commissions on the initial sale of the annuity. Insurance Company sales person makes money. You pay high taxes on your gains when you withdraw them. If you die too early, company makes money.
Yes, an annuity can give you income for life or for a certain number of years. But if anything goes wrong, the company makes money whether you do or not. And the returns tend to be much worse than you could earn investing the same money using other means, without being pigeonholed.
Here’s a better way:
Mistake #7: Mishandling Your Withdrawals in Retirement
Even for ultra-high net worth investors, so much remains outside your control.
Inflation, market volatility, interest rates, life expectancy for you and your spouse – a lot can go wrong, and a lot can go right. But much of it is beyond your ability to control.
If you’re too conservative in your withdrawals or investment strategy, inflation can creep up on you. If you’re too aggressive, or if you withdraw too much each year, you might run out of money. If you take too little out, you can’t enjoy your life the way you want.
Does running out of money seem far-fetched, considering your high net worth?
The recent coronavirus crisis ought to alter your perspective a bit.
Suppose you were taking out 10% per year because the market was doing so well. If you took out 10% in January of 2020, but then lost 30% of your wealth in the next three months, you now have 40% less money than you had a few months ago.
If you did this and you’re only 65, you may have 25 or more years of life still to live. And you now have 60% of the wealth you had just a few months ago. Yes – you can run out of money, even high net worth families.
Managing your required minimum distributions and the taxes associated with them, while also maintaining your investments and living your life in the midst of market volatility and inflation, is a difficult task.
Many high net worth families mess this up, and it causes undue stress in their later years. Don’t be one of them.
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Mistake #8: Ignoring Inflation
Let’s consider the effects of inflation over 25 years.
Suppose inflation remains low. Even at just 2% per year, that will still lead to over 50% in increased costs after 25 years. And some items tend to increase at higher rates of inflation than others, such as college educations for your grandkids.
Even with ultra-high net worth, you will likely spend much more to live once you’re well into retirement than you do now. Don’t ignore this when making investment decisions.
We can also consider the even worse scenarios that could take place if more than one of these mistakes gets made in combination. Ignoring inflation and investing too conservatively is a recipe for big problems in your later years. Combine that with locking yourself up in a couple annuities, and you could be headed for an unexpected tightening of your finances in your 80s and 90s.
Mistake #9: Getting Scammed by Having an Advisor Who Is Also the Account Custodian
The custodian is the company that holds your money. The advisor or wealth manager is the person who helps you decide how and where to invest it. That’s a simplistic way to explain the difference.
For example, Pillar Wealth Management uses Fidelity and Charles Schwab as custodians for our clients assets. We do not hold our clients’ money in accounts that we also own.
Why is this good?
Because when your advisor is also your custodian, that is how scams and Ponzi schemes are born. Too many high net worth scam takes place in an environment where the financial advisor also acts as the custodian. Avoid this arrangement at all costs, and if you’re in it now, get out while you still can.
Mistake #10: Trying to Time the Market
Most experts agree timing the market rarely works. Yet, so many people still try to do it.
How many people predicted that the coronavirus would arrive and destroy the economy, and eliminate 30% or more of their portfolio value in just a couple months? Hardly anyone. And even among those who did, how many had the courage to sell off huge portions of their investments before the crash hit?
Investors fear missing out on big gains, so they hold too long. They see other stocks rising, so they buy when they have already peaked. The market goes down, so they sell too late and seal their losses. During the early days of the COVID-19 crash, the market went down 30% in just a couple days, but then rebounded 11% in one day when the stimulus was announced.
If you panicked and sold after it went down 30% but before the 11% rise, you missed out on a partial recovery of your losses.
In other words, investing based on emotions virtually guarantees poor performance. And timing the market is almost purely about emotion.
A Better Way to Invest in Retirement
There is a better way to earn strong performance up to and throughout your retirement.
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