This article is about the investing mistakes the ultra-wealthy don’t make. If you want to join their ranks, these are the traps you need to avoid.
In order to understand why the ultra-wealthy don’t make these investing mistakes, you need to be aware of one thing:
There’s one major difference between those who are successful investors and those who aren’t!
DECISION MAKING is the most valuable skill one can improve.
By the end of this article, you will have a clear understanding of what separates these 2 groups and how you can improve the ratio of success in your investment decisions!
Here are: 15 Investing Mistakes the Ultra-Wealthy Don’t Make
Don’t worry if you don’t feel like reading, you can enjoy the video below or watch it on YouTube:
1
Investment mistake #1 – Being emotional about money
Emotions trump reason when emotions aren’t kept in check.
The ultra-wealthy have a secret advantage over everyone else called: deal-flow. Deal flow relates to the number of opportunities and investments that they have access to.
The more deals you make, the better your decision-making mechanism becomes and the less emotional you can be about money.
One of the biggest mistakes newbie investors make is that they do not understand all the terms of the deal. So they look only at the surface level and never dig deep into the numbers.
“Do your own research” is just something newbie investors say but never follow through on.
The ultra-wealthy actually do due diligence. The numbers don’t lie… And the more you’re able to understand what’s happening under the hood, the less likely you are to be left holding the bag.
2
Investment mistake #2 – Trying to time the market
The golden rule of investing is: do not buy bad assets.
If you buy a great asset, it doesn’t matter when you buy it, as it will continue to generate value for you.
Your ability to differentiate between bad and good assets is what will determine your rate of success.
Waiting for the right time is most often than not taxing on the person waiting because there’s always demand for great assets, and thus their value will continue going up through time.
The ultra-wealthy know that: Time in the market beats timing the market.
You can actually tell how rich someone is based on the time horizons they use when they speak.
This is what people who have a 12-month time horizon see when they look at an investment:
Ups and downs, fluctuations, and a lack of predictability
But when you look at your investment on larger time horizons, that uncertain graph ends up looking like this:
3
Investment mistake #3 – Short-term bets, trades, and short-term thinking
The ultra-wealthy know quick bucks are a fool’s errand.
Here’s something a casino owner once taught us about the difference between the rich and everyone else.
When the rich come to a casino, they’re there for the experience. They’re walking in knowing they will SPEND money for the thrill, like the ride at a theme park.
They assume that they’re not walking out with the money they came in with as a default.
When poor people enter a casino, they are there to EARN money. Poor people say they go in to double their money, and we all know that the odds are stacked against you and the house always wins.
For the ultra-wealthy, it ends up being a positive experience either way because they got the thrill. They got the thing they came in for no matter if they win or lose.
While for everyone else, it’s only positive if you win.
This difference is crucial when investing because investing dramatically differs from speculation or gambling. Mainly through the time horizon of the outcome.
The ultra-wealthy actually prefer investments they do not have to touch for years upon years.
They know every time they move funds, there will be commissions and taxes attached to those transactions eating away at their profits.
On the flip side, every newbie trader out there is day-trading their hearts out while the platforms they trade on are slowly chipping away at their funds.
4
Investment mistake #4 – Being cash poor
Here’s how the perspective on money differs between those who are educated and those who are still learning.
The poor buy assets with the hopes that they will be able to sell them at a later date for more than they paid for them and thus make a profit.
The wealthy buy assets with the intention of never selling them.
This is the difference between making money and building wealth!
The ultra-wealthy don’t make the investing mistake of selling, they treat their investments like their personal piggy banks.
You buy it and add it to the pile. In time, the pile grows larger and larger. This approach allows you to look at the market differently.
If the market price of an investment goes down, the wealthy jump at the opportunity to buy it at a discount. This is why the ultra-wealthy always have cash on hand, waiting to be deployed.
This is why most of their investments are focused on income-generating assets. So they always have more rounds ready if the market fluctuates.
While poor people make one bet and hope for the best, the rich are in continuous accumulation mode, which is why the rich keep getting richer.
5
Investment mistake #5 – Putting all your eggs in one basket
The more wealth you accumulate, the more your investment strategy changes.
Allocating 100% of your investment to the public markets or a single sector opens you up to complete failure risk if your industry goes under. This is one investing mistake you will never see the ultra-wealthy make. Ever.
Your understanding of risk in relation to your ability to alter outcomes also compounds with time, especially as you begin to build wealth.
Here is the golden rule of diversification:
90% of your investments should be split based on your expertise, the rest is play money.
Here’s what that means: What do you understand best, and in what ratio?
Let’s say you run an e-commerce business and also have some investments in real estate + stocks.
What percentage of your expertise is in the e-commerce industry? What percentage of your expertise is in real estate? And what percentage of your expertise is in stocks?
Let’s say 75% business, 20% real estate, and 5% stocks.
If you’re really good at what you do, you should bet the most where you have a real competitive advantage. Invest in the things over which you have control in proportion to your ability to deeply understand the market.
In this example, business and real estate are where you understand the market most, so 90% of your investments should go toward what you know.
The rest of the 10% can go to alternative investments that have the potential to outperform the market in which you have an interest but do not have 100% expertise to do it full-time.
This 10% is where you can take some risks because it won’t affect your long-term strategy. A great example of an alternative investment is luxury art.
2022 was the best auction year ever, the Big 3 auction houses sold nearly $18bn of blue-chip art.
Especially in times of high inflation or pending recessions like the ones we are in right now. Art is outperforming almost all traditional investments.
For example, one of our favorite artists: Kaws, has seen his pieces appreciate 40%+ year over year.
And we know what you’re thinking: “But Alux, how can the average person take advantage of these kinds of returns when there’s a high entry price-point barrier, meaning only the already rich can afford them?”
That’s where our friends at Masterworks come into play. They took all the concepts from stock investments and brought them into the art world.
Now you can invest in bluechip art the same way you would invest in stocks.
They buy the paintings. Each offering is qualified with the SEC and broken into shares. You buy shares for as little as $20 per share, and once the painting gets sold, the profit is distributed among the shareholders.
All 13 of Masterworks’ exits have been profitable for investors. In all of their exits to date, Masterworks has delivered positive net returns to their investors.
Normally these kinds of investment platforms are closed off to retail investors, but since you’re part of the Alux community, if you go to alux.com/art right now, you can skip the waiting list.
6
Investment mistake #6 – Spreading yourself too thin
Your success as an investor will boil down to making a couple of good calls with enough upside to move your life forward.
This is why the ultra-wealthy have just a handful of diversified investments that they stick with. The ultra-wealthy don’t make the investing mistake of going overboard.
In their hunger for different plays, the newbie investor spreads themselves too thin.
Let’s say you only have $10,000 to invest.
You handpick and buy 100 different stocks and invest $100 in each one.
If, by chance, one of them makes some major moves and doubles in value in a short period of time, your best-performing play made you only an extra $100.
That’s a mere 1% increase in your portfolio, where everything went absolutely right.
Compare that with having picked just 10 stocks, at $1000 each, and one of them going through the same situation of doubling in value.
It’s the same stock and the same event. But it would bring in an extra $1,000, and your portfolio would increase by 10%.
The more you know, the less you need to diversify!
Pick the ones you understand and with which you’re comfortable in the long run, and then invest most of your funds into a handful of carefully selected picks.
Personally, 80% of our stock portfolio is just the S&P 500, and the remaining 20% is just there for quick cash liquidity if we need to change positions.
7
Investing in something just because X invested in it
This one is tricky because the rich have a different friend group than you do. They also have a different level of skin in the game and control over the outcome.
The ultra-wealthy invest in other members of their networks’ businesses because they know how valuable reputation and relationships are.
The founder treasures the investor above everything else, and even in negative scenarios, the investor is usually the one getting paid out before the founder. So relationships aren’t damaged moving forward.
If you’re going to play long-term games with long-term people, you need to be able to trust them.
Newbies and retail investors try to piggyback on other people’s choices, thinking they will get a free ride. The ultra-wealthy don’t make this investing mistake as you do not have the same agility of play as they do.
A good rule in life: If you’re walking in the footsteps of someone else, know that they already got the reward before you got there!
This is why we don’t recommend you give out stock investment advice or crypto advice to friends and family.
You might be really into it 24/7 while they are not.
Let’s say you recommend a stock or a token that does really well, and you exit your position.
Because they don’t monitor the situation closely, they fail to do the same, and due to unforeseen events, the price tanks. Your family and friends are now holding the bag.
When you give someone financial advice, you assume the obligation of keeping them posted and making sure they behave the same way you do.
When projects fail, you will end up resenting the other party, and they will resent you because, for most people, money is emotional. This is why this next point is so important.
8
Investing in things they don’t understand
The ultra-wealthy stick to the beaten path. It’s good for a reason because it will get you where you need to go.
Other people will throw distractions and shiny objects at you all the time, trying to separate you from your hard-earned money.
You don’t need to invest in an emerald mine in Zambia. You don’t need to put a downpayment on an apartment in Dubai for flipping purposes if you’ve never been there.
Be careful of who you choose as your advisers, and ensure you do not fail to understand the fundamentals.
If you cannot explain it end to end to someone else, you shouldn’t invest!
This simple rule will keep you out of a lot of trouble.
9
Failing to rebalance a personal portfolio
Newbie investors believe in set-and-forget approaches to building wealth, the same way they believe in the 4-hour work week or weight loss teas.
Sounds good… Doesn’t work. This is an investing mistake the ultra-wealthy just don’t make.
Depending on your strategy, the rebalancing intervals vary in length. The super-wealthy rebalance every couple of years or once a decade, assuming there are no major financial events.
What does it mean to rebalance your investments?
Let’s assume you have 100,000 dollars and want to maintain the following ratio of investment:
70% Real Estate – 25% Stocks – 5% Crypto, or Blue Chip Art because you believe this is the right distribution for you.
- $70,000 goes toward real-estate
- $25,000 in stocks and
- $5,000 for crypto or art
__________________
Total $100,000
Everything goes well, and after a couple of years:
- The apartment you purchased is now worth $100,000.
- The stocks are worth $50,000.
- And your crypto went 100x and is now worth $50,000 as well.
_________________________
Total $200,000
The total value of your portfolio has now jumped from $100,000 to $200,000, but the ratio is no longer there.
The ultra-wealthy know the importance of rebalancing portfolios, so they don’t make this investing mistake.
To stick to your investment strategy (70-25-5) the new $200,000 split should look like this:
- $140,000 real estate.
- $50,000 in stocks &
- $10,000 in crypto or art
Knowing this, at this point you should be selling $40,000 worth of crypto or art and making another real estate investment with the proceeds from the sale.
This process of rebalancing will keep your wealth safe and growing throughout the years, no matter what the market does.
10
Panic selling
Even worse, people sell when the market drops, thinking they will buy later, even cheaper… Sure, you will.
They’re always taking a complete failure approach to everything.
This causes uneducated investors to freak out and try to minimize their losses instead of calming down and assessing the situation.
Whenever this happens, the ultra-wealthy revisit the fundamentals of the investment. What has changed since my initial investment, outside of price?
- Has the promise changed?
- Is the company still around?
- Is it still profitable?
Basically, you revisit Number 2 on our list.
If your fundamentals are good, you understand what goes on in the business, the numbers still make sense on paper, and your long-term vision for the product is still intact, price drops are a completely different signal to the ultra-wealthy than to everyone else.
That’s when they buy more.
Here’s a quick story on why Jeff Bezos doesn’t get enough credit as a savvy operator.
In the year 2000, the stock price of Amazon fell by almost 90%. Every media outlet was calling the end of the internet and the tech bubble.
Jeff knew how well the company was performing and issued the following letter to its shareholders. It will forever change the way you look at businesses.
In the letter, he goes through bullet points on how much better Amazon was doing than the previous year, despite the massive drop in stock price.
The same year, Amazon bought its own shares back at a massive discount, and they went back to work.
Once emotions were no longer a variable, people understood just how valuable Amazon was and just how heavier – in the words of Mr. Bezos – the company was becoming.
This particular Amazon story and case study is just one of the examples we use to help the paid subscribers of the Alux app make smarter financial choices, among other things.
We couldn’t be prouder of how valuable the app has become for our most loyal Aluxers and the kind of transformational impact it has had on their lives.
If you want to give yourself the best shot at winning the game of life, download our app and join the tens of thousands of people who use it daily. They’re out there making progress while you’re still on the sidelines, not knowing where to start. Allow us to fix that!
11
Investing based on what’s in the news, newsletters, or forums
If you’re old, you’re probably watching Cramer on CNBC, Fox, or whatever you think is the one for you.
If you’re nerdier, you’re probably paying for a couple of newsletters that, honestly, you almost forgot about now that we’ve reminded you.
Younger? You’re probably here from the wallstreetbets subreddit or some other meme stock telegram channel.
It’s all chaos. It’s all Monday morning quarterbacking.
Nobody can make you rich!
You have to make yourself rich! You have to be laser-focused on something you deeply understand and then assume the risk that you might be wrong.
If you aren’t, then you get a reward in proportion to the risk you were willing to assume. These platforms are just for entertainment. Treat them as such, and you’ll be okay.
12
Not taking out profits
Here’s another staple of the investing world: Nobody ever went broke by taking profits!
In the same way, you should dollar cost average on the way down, the same way you should sell on the way up
This ensures you will have some healthy profits set aside no matter what. The smartest people in crypto we know had a simple strategy: went massively early on, and things started to go up like crazy.
That’s when they pulled out their initial investment plus some solid profits, leaving the rest untouched. This is what the rich call: a free roll.
Once you take out what you put in and maybe a little bit on top to make the journey even more pleasant, it doesn’t really matter what happens with what you left in.
The price might skyrocket, and then you keep on taking profits from it, or it might go to zero. However it goes, you’re still unaffected because you already cashed in.
The reason newbie investors don’t do this is because of greed and because some are actually degenerate gamblers pretending to be investors.
The problem with betting everything on red every single time is that in order for you to win, you have to be right 100% of the time. It takes only one unforeseen event, and you will lose everything.
13
Constantly checking your investments
Here’s a big one: If your investments are keeping you up at night, you’re overinvested!
It’s as simple as that.
Sure, there’s a frequency to keeping tabs on everything you invested in to ensure there are no big changes you should account for. But if you’re waking up in the middle of the night to refresh your portfolio, you’re doing it wrong.
The continuous need to check, double-check, and triple-check is just time wasted and anxiety-inducing, especially when there’s nothing you can do to alter the outcome. This is an investing mistake that you won’t see the ultra-wealthy make.
14
Going YOLO
This an investing mistake the ultra-wealthy don’t make, but most newbies make much too often.
A basic understanding of math prevents high-net-worth individuals from betting the house on any speculative investment.
This concept of Low probability and High perceived reward
Almost always, it backfires in the medium term and always backfires on larger time horizons.
Newbie investors usually make the mistake of Going for the highest-yield option
Usually a few steps lower than that, there are options with a high enough yield to make the investment worth it but with exponentially lower risk.
15
Thinking, “This time is different.”
Numbers don’t lie, and people don’t change. And it pretty much applies to all aspects of life.
Once you get burned, don’t put your hand back in the fire!
Sometimes, taking the L and walking away is way more productive than trying to recoup the loss by throwing more money in the fire. Usually, the outcome is just a larger fire.
These were the 15 investing mistakes you won’t see any ultra-wealthy people make. Make sure you’re aware of them and stay clear if you want to join their ranks some day.
