6 Ways to Mimic Financial Practices of High-Net-Worth Individuals

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Since well before the popular 1980s TV show, Lifestyles of the Rich and Famous, or even jetsetting Instagram influencers, society has been preoccupied with wealth. It goes back to the “let them eat cake” French revolution era, and arguably even earlier, such as during Russian feudalism in which estate holders owned and controlled the serfs who worked the land.

The power struggle, in other words, has always been real.

Fortunately, we now have more intel than ever on how wealthy individuals use their money. Ahead, we pulled anonymized data from high-net-worth individuals who use the Personal Capital Dashboard and spoke to Michelle Brownstein, a certified financial planner and senior vice president of Personal Capital Private Client Services, for her tips on what we learn.

1. Learn the difference between earning, saving, and investing

Today, it’s said that anyone can achieve great levels of wealth when living in democratic capitalist economies, thanks to education, social mobility, and job opportunities. Of course, it’s not so cut and dry, with several factors like race, language barriers, and ability influencing a person’s access to opportunity. However, it’s possible for someone to learn how to create generational wealth and break open glass ceilings that may have once kept them bound to the economic rung onto which they were born — and doing so is part of the so-called American Dream.

But while social mobility is arguably more possible in contemporary times, there’s a learning curve. “Making money is one part of it,” says Brownstein. “But it’s also making sure your money is working as hard for you as you work to earn it.”

Making money “work” by earning interest, dividends, and returns is something today’s rich have learned to do better than most, says Brownstein, who works with high- and ultra-high-net-worth clients with at least $1 million (sometimes $30+ million) in their portfolios.

“That’s something I think the high-end ultra-high-net-worth investors have figured out a little bit more than like what I called the mass affluent investor,” Brownstein says. The skills needed to get rich are different from the ones required to stay rich and eventually earn on your money.

Social media may have convinced us that wealthy people spend money 24 hours a day on luxury vacations, expensive jewelry, high fashion clothing, and $12 green drinks — but a closer look reveals that truly wealthy people invest enough to outweigh their spending.

Here are the trends from Personal Capital user data:

Most households with anywhere between $1 million and $30 million net worth keep under 20% of their portfolios in cash, compared to lower net-worth households who keep between 27% and 45% in cash.

Why this matters: The more cash, the less inflation-resistant your portfolio is, and the more you’re missing out on stock market returns.

Generally, as net worth increases, the households tend to have a slightly larger percentage allocated to alternative investments. Households less than $1 million averaged 3.5% allocated to alternatives, while households greater than $30 million averaged 5.2%.

Why this matters: A diversified portfolio helps you earn even when the stock market is down.

Ultra-high-net-worth people ($30+ million) keep more cash than is efficient, but only because they can afford it.

Why this matters: Households with $1 to $30 million net worths keep only enough cash to cover their annual budgets, then invest whatever they don’t plan on using. After $30 million, people tend to relax a little bit because investing isn’t as crucial given they have significantly more money than needed to live.

2. Trust your strengths (and get support when you need it)

“A lot of people are really good at earning money, but they’re not really good at investing it,” says Brownstein.

Today’s investor should know which bucket they fall into. Are you entrepreneurial and great at making money? If so, talk to a financial planner about how to budget, save, and invest it so you don’t constantly feel like you’re starting from ground zero. Are you thrifty and great and making budgets lean? Maybe practice negotiating a raise at work so that you generate some more income to work with.

And when you do negotiate yourself to higher income brackets, be prepared to learn new skills at every juncture.

“Sometimes what will happen if someone is used to saving and investing a certain amount of money — say they max out their 401(k), they put a few thousand a year into a brokerage account — is that their income goes up, but they don’t proportionately increase their savings,” Brownstein says. “Then they end up with this cash sitting on the sidelines, because they’re not adjusting.”

If you get a big raise or a big bonus, and you’re not really sure what to do with it because it’s not part of your normal saving cadence, it’s a good idea to hit pause. Decide how to most efficiently allocate that cash before you spend it all on things you don’t care about.

“A lot of the tools Personal Capital provides are really helpful for this,” says Brownstein. The tools in the Personal Capital dashboard can break down hypothetical scenarios and suggest how much more you would have in retirement if you invested it, rather than spend it on immediate wants or needs. That way, every decision is well-informed.

Personal Capital tools can also tell users, based on their spending habits, if they are saving and investing the right amount, or if they’re putting too much aside and therefore risking having too little cash to cover their daily expenses.

3. Notice when your emotions are guiding your money decisions

“Unfortunately, a lot of people make very emotional decisions with their money,” says Brownstein. “Behavioral finance is probably the most interesting part of what we do day to day. It’s the psychology behind investing.”

Both markets and emotions fluctuate daily, but getting into routine habits with your money helps you prioritize your future security even when you’re feeling like treating your coworkers to brunch or splurging on a new toy for your kid. There’s nothing wrong with enjoying your money, or even using it to console your bad feelings. Just simply be aware of what motivations are driving each action.

When it comes to investing, dollar-cost averaging (aka putting the same amount into investments each month no matter your mood) helps average out your contributions. Doing so is likely better longitudinally than trying to time the market’s highs and lows — which rollercoaster just as much (if not more) than human feelings.

Worried about market volatility? Get perspective with our Retirement Planner by seeing how your portfolio would have recovered from periods of historic market lows.

4. Know your ‘why’ behind investing

Having an unshakable sense of self-knowledge is key to reaching your financial goals.

“If I asked nine or 10 investors, ‘What is your primary goal?’ They’re going to say things like they want to be financially independent by a certain age, have a comfortable retirement, pay for their kids’ college, buy a second home, or whatever it is,” Brownstein says.

Your goals become the guideposts for all of your financial decisions, affecting choices like asset allocation, risk tolerance, debt payoff, savings, your budget, and more.

5. Diversify your investments

Personal Capital’s data reveals that wealthy households have at least 4% to 5.5% of their portfolio allocated towards alternative investments. This category of investment includes what may have once only been available to institutional investors (hedge funds, investment banks, etc.), but now through exchange-traded funds (ETFs) and fintech platforms are becoming accessible to retail investors at a smaller scale.

“The expansion in the ETF markets in the last couple decades has been huge for retail investors,” Brownstein says. “Because if you think back to the late 90s, someone with hundreds of millions of dollars to invest could go buy physical property — like literally go buy commercial office buildings — if they wanted that exposure, because they had the money to do it. Someone with $1 million can’t go buy a commercial office building, or even buy a sliver of it.”

But now, ETFs have democratized these types of assets, according to Brownstein. Someone desiring exposure to real estate could buy shares of a low-cost ETF that is a diversified basket of real estate. It could include fractionalized shares of office building strip malls, data centers, multifamily real estate, etc. across several geographic regions of the country.

“You could buy in one ETF and get exposure to New York and San Francisco and Houston and Atlanta and Chicago,” Brownstein says, all with a minimum investment of $1,000.

Brownstein defines alternatives as physical assets, metals, commodities, agriculture, real estate. Like the millionaires and billionaires before us, today’s retail investor can build what Brownstein calls an “institutional-style” portfolio without writing a $50 million check to go buy farms to get agriculture exposure.

As for what percentage of your portfolio to allocate towards alts, it depends on your risk tolerance and interest level. Most financial planners and advisors wouldn’t suggest you devote more than 10% to 12% of your portfolio to commodities or alternative investments you don’t personally understand or feel excited by.

“The old saying is if someone’s not sure what to start with, they might buy a real estate ETF. They understand real estate, but they may not have the first clue about commodities, for example. Sometimes people choose to delegate [to a financial planner]because they don’t understand. They understand that being more diversified is probably better, but they’re not sure where to go.”

6. Stay focused and fight FOMO

In a similar vein, don’t just chase the hottest investments because they make news headlines.

“You should invest in something for the right reasons,” Brownstein says. “If you really believe that it’s adding diversification and another layer to the portfolio. Great. If you are doing it, because you’re afraid you’re gonna miss out on the big upswing … it could just as easily go away.”

Any time you feel FOMO rising, ask yourself whether the investment in question is actually allowing you to reach your goals in a more efficient way.

“Having that 30,000-foot view of ‘Does this help me get to X, Y or Z goal? Or does it not?’ That is a good way to evaluate any investment,” Brownstein says.

Want a better way to manage your investments? Millions of people use Personal Capital’s free and secure online financial tools to see all of their accounts in one place, analyze their investments, and plan for long-term goals, like buying a house or saving for retirement.

Get Started with Personal Capital’s Free Financial Tools

 

Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.