Accumulating wealth isn’t supposed to be easy, but many Americans are really good at it. In fact, the United States added 379,000 new millionaires to its ranks last year, according to a UBS report. That adds up to over 1,000 a day.
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Another challenge for all these newly minted millionaires is to grow and protect their wealth so they never have to worry about losing it. Unfortunately, many wealthy people lose their wealth or keep it from growing because of unwise financial and investment decisions.
Here are four of the most common mistakes the nouveau riche make when investing their money.
Successful investing involves more than choosing the right asset classes. You also need to invest in a way that makes financial sense, which means paying close attention to the tax implications.
According to the blog of Texas-based luxury investment firm Avidian, failure to adopt tax-efficient strategies can lead to wealth decline over time. For example, she explained, some investors with large portfolios of dividend-paying stocks often ignore the tax implications of dividends.
“Without proper tax planning, they may end up with a large annual tax bill, which will reduce their overall return on investment,” Avidian noted.
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The new rich don’t always follow the same pattern as their older peers — especially now that so much money is being poured into crypto, real estate, private equity, and startups rather than stocks and bonds.
“Being willing to go against conventional wisdom is a really important developmental stage,” Brad Klontz, a certified financial planner (CFP) and professor of financial psychology at Creighton University, told CNBC in an interview last year. “Young people tell me this on social networks [traditional investing advice] it’s not the way things are done anymore. Everything has changed.”
The problem is, ignoring conventional wisdom often means you’re not doing enough to ensure long-term financial security. “It’s a really long game when it comes to some tried and tested investing,” Klontz said. “And when I hear people talking about crypto and alternative assets, it’s much more of a short-term play mindset.
One thing you can count on when you first have a lot of money is that friends, partners, and even family members will offer you the opportunity to invest in their business or companies. But you have to be very careful here.