The richest give investment advice to their own children
Wealthy families have a plethora of opportunities that the rest don’t – and one of the most important factors helping the wealthiest remain The richest is access to world-class financial planning. Advisors who work with wealthy clients help them manage their wealth, but the rules they rely on can help the rest of us, too.
In fact, consultants emphasized that they would pass many of the most effective strategies they use on their clients on to their own children — and you don’t need a private jet or yacht to implement them. “My practice is primarily focused on working with wealthy families. What I can say in no uncertain terms, however, is that the best strategies for managing money are equally applicable to all levels of wealth,” said Jonathan Shenkman, consultant at Shenkman Wealth Management.
“Maintaining a healthy relationship with finance and money is the foundation of a successful investment and financial strategy for high net worth individuals and all investors, young and experienced,” added Colleen O’Callaghan, Wealth Partner at JP Morgan Wealth Management.
Balance your wealth
Determining your asset allocation is an important first step in building your portfolio, and a diversified portfolio is one of the best wealth-building strategies. “The first component is getting the overall asset allocation right, which is how much exposure to stocks, bonds and cash you want to have to meet your goals,” Shenkman explained.
Your personal asset allocation depends on your time horizon as well as your investment goals and risk tolerance. “As we’ve seen in 2022, capital markets (both stocks and bonds) can be very volatile,” said Heather Wald, partner at Bel Air Investment Advisors. “If your tolerance for volatility is low, meaning you’re uncomfortable with the short-term price movements of your investments, your portfolio’s exposure to risky assets — like stocks — should reflect that sentiment,” she added.
It is also important to rebalance your assets and avoid portfolio shifts. For example, if the market goes up and down, a portfolio that invests 60% of your assets in stocks and 40% in bonds could become 70% stocks and 30% bonds over the course of a year.
Diversification isn’t just about asset classes, it’s also about what you actually invest in. While it can be tempting to jump on the bandwagon of investing trends that look like potential growth opportunities, advisors have stated that the best way to amass wealth is to invest slowly and steadily. “Use broad market indexes as the core of your portfolio to minimize risk and mitigate many common investment mistakes,” Shenkman said. “A long-term investment portfolio can be supplemented with opportunistic trading, but chasing trends or jumping to the ‘next big thing’ is not a strategy,” said O’Callaghan.
Prioritize cash Flow
Regardless of your income or net worth, it’s crucial that you have enough cash on hand so you don’t end up having to pull money out of your wealth to meet day-to-day needs. “Many wealthy individuals have investment portfolios designed for growth because they also have components of their personal balance sheets to meet their needs,” O’Callaghan said. “These investors can grow their investments instead of having to sell them if the unexpected happens because they have a safety net.” Although there may be fewer zeros in your portfolio, the same principle applies.
Advisors recommend having enough in your savings account to support you for at least three to six months. By paying yourself first and automating your savings account, you can automatically deduct from your income to pay off debt or add cash to a specific savings account. A common recommendation to save enough for retirement is to invest 15% of your income each year, but any amount you invest will go a long way if you earn interest on it.
Take the emotion out of investing
Many of the biggest investment mistakes advisors see young people making are not necessarily strategic misjudgments, but emotionally driven decisions. While seasoned investors are used to the ebb and flow of market cycles, newer investors can easily become alarmed when they see their portfolio falter during a bear market. “[Historical perspective] is one of the biggest differences I see between previous investors and investors with significant experience,” said Modernist financial advisor Georgia Hussey wealth. “For example, I have an 80-year-old client and he’s not bothered at all by the current inflation and the rising interest rate market,” she explained. “The first thing my wealthy clients do is they put the noise in context and they usually just ignore it.”
Keeping your cool when the economy starts to turn down is a skill all savvy investors must learn. “Panic selling out of a declining market and converting paper losses into realized losses can impact the overall portfolio,” explained Wald. “Trying to time the market is often a losing game – not only do you need to get out at the right time, you also need to get back in to participate in the subsequent recovery.”
Shenkman explained that young investors can combat mistakes caused by fear of the market by removing the emotional component and simply automating their investments from their bank account. “Automating your strategy to remove emotion from your investment process is essential,” Shenkman said. “This includes automatically debiting every paycheck into your retirement and tax accounts to ensure you’re buying at every stage of the market or economic cycle and avoid timing the market,” he added.
Overall, advisors emphasize that the earlier you start, the better off you are at investing. “The strongest advice I try to instill in my own children is to appreciate compound interest, or the interest that is earned on interest. It’s important for young investors to understand that their greatest asset is time,” Shenkman said.
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