At the beginning of your investment journeys, most of you would have questioned how the rich became so rich. And depending on the kind of person you are, reasons such as luck, criminal activities, hard work and genius or karma would have churned in your thoughts. Most of these thought processes would eventually lead you to thinking “these people must have had access to insider tips that allowed them to act before we did!”.
But here’s the dirty little secret – there is no dirty little secret. If you listen to what millionaires say about their investing habits and talk to the people who study markets and advise them, you quickly learn that contrary to what most people believe, millionaire investors adhere to the same tried-and-tested investing principles to achieve long term success.
Let’s take a look at three of these principles which can help you build wealth for years to come.
#1 Know your risk tolerance
If you think most millionaire investors made their money going all gung-ho with high –risk all-or-nothing bets or ventured into securities of the exotic kind, you couldn’t be farther removed from the truth. The reality of the situation is the rich are more worried about risk than the average layperson. We’re not making this up; it’s according to a 2013 study conducted by Spectrem Group, a research firm that specialises in the financial habits of the wealthy.
More than 90% of millionaire investors surveyed indicated that they worry about risk—especially the risk of losing some or all of an original investment. A 2013 U.S. Trust survey found that 63% of investors with at least $3 million in investable assets prioritised lowering risk even if it meant a lower potential return.
This rule is in-sync with what Warren Buffett always advocated as the number one rule when investing: Never Lose Money. The bottomline is that if the people with lots of disposable cash try to minimise their risk in their investments, you should definitely be thinking about it if not actively pursuing it already.
#2 Get help, but stay engaged.
You don’t have to be shy to admit the financial world is a complicated and volatile jungle. Even millionaire investors feel that way, according to U.S. Trust, 79% of millionaire households use some kind of professional adviser. For instance, 66% of investors with at least $3 million in investable assets say they don’t know all that much about how the recent tax-law changes will impact their investments.
A financial adviser can help you in many ways that you may not even know. Tax planning, insurance coverage and types of investment opportunities are just some of the examples of how having a professional will help you make informed decisions. Most discerningly, about 65% of millionaire investors are still hands-on with their investments. Thus, it means that the rich simply engage financial advisers to help make sense of any forthcoming relevant information they require to know while sticking to their own investing plans.
#3 Invest for the long haul
An overwhelming majority, about 86%, of millionaire investors believe that the buy-and-hold approach is the best strategy for growing money over time, according to U.S. Trust. And we believe that a substantially higher figure than 86% of millionaire investors would probably also tell you that it’s a good idea to buy low and sell high and to invest in high-quality companies. You should listen.
These basic investing mantras may seem obvious and too simplistic, but they are what make the rich become richer. This is especially so when markets undergo corrections, and people are terrified to pull the trigger on buying stocks at undervalued prices.
But that’s when Jennings says millionaires know to get back to basics. “Stay disciplined, and try to take emotion out of the decision-making process,” he says. “You’re not going to get rich overnight. It’s all about creating a good, solid plan for the long term and sticking to it. So there you have it – you’re now on your way to investing like a millionaire to become a millionaire.
DollarsAndSense.sg aims to provide interesting, bite-sized and relevant financial articles.
Learn together with like-minded Singaporeans at the Personal Finance Discussion SG Facebook Group by discussing a range of personal finance topics.
If you have not done so, subscribe to our free e-newsletter to receive exclusive content not available anywhere else.