Three Mistakes the Wealthy Make

Three Mistakes the Wealthy Make

Gather, don’t scatter.

Over the years, investors have been incorrectly convinced that proper investing meant taking their money and spreading it out amongst several investment professionals. Over time, many investors accumulate, on average, four advisors and several accounts. From his 401(k), Roth IRA, Traditional IRA, brokerage and mutual fund accounts, to her 401(k), Traditional IRA, trust and saving accounts, a family can accumulate several accounts with several financial institutions.

This scattering of assets leads to a false sense of “diversification” by “not putting all of your eggs in one basket.” Trouble is, this strategy really hurts most investors.

Many investors have unknowingly scattered their assets, resulting in no one person managing or fully understanding their entire situation, goals or dreams.

You wouldn’t have one dentist that worked on your top teeth, and another that worked on your bottom. Nor would you hire one accountant to work just the first six months of the year, and a different one to do the second six months. This would be crazy and make proper dental care tricky, not to mention filing your taxes.

So why do people often hire several financial advisors, and not just one to oversee all the investments and the financial plan? Without comprehensive planning, there actually is no plan at all.

1. Improper Asset Allocation

Many investors have their assets dispersed with several advisors and several financial firms. No single advisor knows what the other is doing, resulting in an uncoordinated portfolio. One advisor in firm A might be selling the very asset that an advisor in firm B is buying. Unless there is one chief reviewing the entire portfolio, then your money is not coordinated.

Your asset allocation should always reflect your current position in life, your current goals, dreams, feelings and family characteristics. When your hard earned money is scattered across advisors and institutions, only you are left to properly manage your portfolio. Many individuals are not trained to monitor this correctly and consistently. Unfortunately, the overall plan suffers.

2. Improper Correlation Within Investments, Managers and Funds

Without it saying, each investment needs to be excellent on its own. The investment, manager or mutual fund needs to have a strong track record (I like a ten-year record). You expect the investment manager to be able to select quality investments over time. That’s usually not the problem. Where the breakdown occurs is knowing how this investment interrelates with the others. This is nearly impossible to track when one advisor is doing one thing, and a different advisor is doing just the opposite.

Let’s think about a recipe analogy. You might have the best ingredients to make your favorite dish. You might even have quality chefs at your beck and call ready to make this dish for you. If you put all of these chefs in the same kitchen but don’t let them know what the other is doing, a culinary disaster awaits. You can see that the likelihood of your meal coming out correctly is very low, no matter how talented the chiefs are or how fresh the ingredients. Same is true with your investment portfolio. Each piece has to correlate with the other.

Perhaps even a better example – a Swiss Pocket watch. Take off the hands and the face, look at the interworkings. One gear moves the other, which is powered by a wind up spring, that moves yet another gear that moves the hand, that allows you to tell time. Now, all of those components are correlated! Your investments can be as well.

3. Failure to Monitor the Consolidated Portfolio

You know life is not static. Life is constantly changing. Whether it’s your job, children, the economy, world events, new laws, unplanned expenses (and the list goes on and on), your world constantly moves. Your entire portfolio needs to be dynamic as well. When market forces move, the properly managed portfolio needs to move with it. I am not talking about day-trading, but rebalancing when and where appropriate. Additionally, your goals, dreams, feelings and family characteristics are changing as well. Every day is either a day closer to your goals, or not.

Having your assets scattered makes it nearly impossible to properly monitor your portfolio based on your changing life. With the technology and tools available, along with the new “open architecture” available at full service financial institutions, I believe you are better off hiring one advisor to help you monitor your entire portfolio. This trusted advisor will coordinate all of your “eggs” and not put them in the same “basket.” He/she can manage your diversified portfolio to meet your goals, dreams, feelings and family characteristics and make sure your entire portfolio works in unison to make your dreams come true.

NOTE: In the past, many firms were limited to the solutions they could individually bring to the client. Many advisors had to use their own proprietary funds or investments, which may or may not have been in your best interest. Investors had to go to firm A to buy bonds, then to firm B to buy CDs, and still firm C to buy stocks. Today, full service firms have an “open architecture” and are able to go to the marketplace and bring any solution to you that is appropriate. For your strong consideration, only hire an advisor who can go anywhere in the marketplace without limitation!

There is no requirement to continue making the mistakes that others make! Your legacy and your financial goals depend on you not making them.

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