4 Common Investing Mistakes the Wealthy Make

Investing plays a pivotal role in both building and safeguarding wealth, particularly for individuals with assets exceeding $1 million. At this level, every investment decision carries additional layers of complexity and can lead to sweeping consequences. Wealthy investors may have made smart choices to reach this status, but greater assets raise the stakes. Even seemingly minor mistakes can have drastic effects on long-term financial health.

This article covers some of the most common investing mistakes wealthy investors make, along with ways to avoid them. We outline the importance of thorough diversification, the need for defined tax strategies, the risks of emotional decisions, and the value of professional guidance. Additionally, we share the insights of three financial advisors experienced in working with high-net-worth clients.

1. Overlooking Diversification

Diversification is often discussed as central to a successful investment portfolio. However, it can take shape differently depending on the level of wealth, risk tolerance, and goals someone has. As a result, some high-net-worth investors may mistakenly believe they’re diversified or overlook the issue entirely.

“Many high-net-worth individuals become under-diversified without realizing it,” and some might believe they check the box “because they often own multiple accounts, funds, asset classes, etc.,” says Daniel Milan, Managing Partner at Cornerstone Financial Services. He notes that a lack of diversification among large portfolios can manifest in multiple forms, such as holding too much of one asset, over-concentrating on one industry, or investing in “a basket of ‘funds or ETFs’” containing “many of the same underlying stocks,” especially with no specific reason for doing so.

Overlooking diversification can be easy if a portfolio has grown significantly over time or was originally built to scale under different circumstances. But without a deliberate review of one’s asset mix and how it all fits together, risks can grow and become larger during times of market volatility or poor performance.

“Concentrated positions are developed either through some form of executive compensation (as in receiving stock grants), and/or owning a position for a long time that has had an exceptional run (think AAPL or NVDA),” says Bob McCarty, vice president and advisor at EP Wealth Advisors. “The challenge with either one is that the performance of the position can ultimately overwhelm the performance of the entire portfolio. If the holding is doing well, the portfolio grows similarly to the holding. However, if the holding has a pullback, the impact on the portfolio will also be outsized. Think if the holding gets a cough, the portfolio gets the flu.”

Implementing some level of diversification, suitable to your risk tolerance and goals, could help you protect yourself from unnecessary risk. At the most extreme level, it can reduce exposure to losses concentrated in a single area of your portfolio experiencing adversity. To understand what’s right for you, however, it’s smart to meet with an experienced financial advisor.

2. Lack of a Defined Tax Planning Strategy

Failing to develop a strategy to account for taxes across assets is an error that wealthy individuals sometimes make. As your financial picture becomes more complex, so often do your taxes. Without a plan, it’s easy to overlook all the things you’ll need to do to remain compliant and optimized for success.

“At higher levels of wealth, taxes come from everywhere — IRA distributions, portfolio income, capital gains, rental income, pensions, Social Security, and property taxes,” explains Adam Spiegelman, CFP^®, founder and wealth advisor at Spiegelman Wealth Management. “Many people fail to look at all of these together in a coordinated way.”

The downsides of lacking a clear plan, however, can include:

• Missed opportunities. With a plan, for instance, you may have a better pulse on efficiency opportunities, such as when to harvest losses while investing.
• Paying unnecessary taxes. Failing to put your assets in tax-optimized situations or locations or withdrawing at the wrong times can incur costs, such as capital gains tax or income tax, that you may have avoided or lessened.
• Not compliant. Without a plan or expert advice, compliance issues could arise. This is especially the case if you have a complex financial situation, as most high-net-worth individuals and families do.

“Successful people with any size portfolio will also have tax issues and concerns,” says McCarty. “Focusing only on near-term tax preparation, without also investing in long-term planning around a sound tax strategy, will potentially open the client up to more complex tax issues. It is imperative that, as wealth accumulation grows, so should the thoughtful consideration of issues and concerns that larger portfolios will generate.”

As a high-net-worth investor, the key takeaway is to adopt a coordinated approach that considers both short-term and long-term tax needs. A financial planning professional can help you understand how this fits into your holistic plan and aligns with your investing needs and goals.”

3. Investing Emotionally or Without Due Diligence

Even at high levels of wealth, emotions can be a commonly present factor in investing choices. However, when larger sums of money are involved, acting impulsively or with incomplete information can have unintended consequences.

“Emotions are part of investing. That’s human nature,” says Spiegelman. However, he highlights that “[without] experience, education, or a coach to provide perspective, it’s easy for investors to take on more risk than they realize.”

Emotional investing can take place in several different ways, including some of the following:

• Quickly reacting to market volatility or headlines.
• Investing in a friend or family member’s business out of goodwill or without doing proper diligence beforehand.
• Investing in an industry or sector, especially an unproven one, solely because of “fear of missing out” (FOMO).
• Investing in things because you think it’s what you’re “supposed to do” rather than what’s best for your goals, time horizon, and risk profile.

“Those two things — emotional decision-making without proper due diligence — can be the source of significant portfolio harm,” says McCarty, adding that “[there] are so many sources of information and opinion available lately that, without proper vetting, can raise concerns an individual may have to a fever pitch.” In practice, he adds that these sometimes show up when investors consider selling off assets or “’moving to all cash’ due to headlines or other online comments they’ve read.”

“This kind of panic driven behavior looks at just a fraction of the total picture, ignoring the impact of taxation, the impact on their long-term strategy, and not least is the information they’ve heard even real,” McCarty says. “Investing and wealth accumulation and preservation is best viewed through the lens of your overall strategy and time horizon.”

As your portfolio grows, emotional investing or not doing a complete analysis of what you plan to buy or sell could increase risk. With that in mind, as McCarty highlights, consider verifying that your choices align with your strategies, financial situation, and goals. A financial advisor or investment manager can be an invaluable resource to help you understand what may work best for you.

4. Not Considering a Financial Advisor

Large portfolios can be hard to manage alone. While some high-net-worth individuals may prefer or even thrive in taking a “do-it-yourself,” or DIY, approach, others could be making a mistake by overlooking the support of a financial professional.

As wealth grows, individuals confront some of the challenges we’ve discussed so far in this article: having the right asset allocation for their stage of life, navigating tax strategy, and making sound investment decisions. All of these carry weight in terms of their impact on a portfolio and can be difficult to devote full attention to if you already have a full life.

So, when should someone consider a financial advisor? “It’s rarely about a specific dollar amount,” says Spiegelman. “Some very wealthy people manage their own money, and some people with far less choose to work with an advisor. The real trigger is usually complexity, time constraints, or feeling overwhelmed,” he explains.

It may be time to consult a professional if you feel that your investments and financial situation have become too challenging to handle. Similarly, if you just need help figuring out how different aspects (e.g., your investments, savings, retirement plan, or estate) of your finances piece together, even if you’ve seen significant investing success, it could be a sign to seek the expertise of an advisor.

“There are a wealth of related areas that can impact – positively or negatively – your success and the interconnectedness between all of them are nuanced,” says McCarty. “Having a team of professionals by your side through all aspects of your financial life to help with decisions, be there when needed, helping ensure that your portfolio serves your needs and values, and ensuring your assets serve you and your desires now and beyond your life are the true value of having a financial advisor.”

While not every person needs a financial advisor to have investing success, it can be valuable to have a second pair of eyes—even if they’re there to tell you you’re on the right track. If you want to begin your search for one with the right expertise, we recommend using this free matching tool. After a short set of questions, it will match you with a fiduciary expert who fits your needs.

Bottom Line

The mistakes outlined in this article share a common theme of small oversights leaving an impact on larger portfolios. Whether it’s not being intentional with diversifying, not planning for taxes, overlooking due diligence, or not considering support in some way, even seemingly non-choices can carry potential consequences.

As the experts in this article have mentioned, it’s vital to consider all angles and understand how your investing choices and strategy align with factors such as your goals, risk tolerance, and overall life. Sometimes, this may even just mean recognizing that you’re not sure about the next step and looking for an expert to walk through it with you.