Wealth management can be an emotional process. Just because you’re a successful high-net-worth (HNW) individual doesn’t mean you’re immune to fear, greed, pride or other emotions that can sabotage sound financial decisions.
If you want to build and protect your wealth, you must become familiar with scenarios where emotions can get in the way of reasoned investment analysis. More importantly, you’ll need to step “outside your mind” and consider the life experiences that lead to these emotions from an objective, emotionally neutral point of view.
Here are four typical situations.
The scenario: The market suffers a correction, and your portfolio shows a 10% paper loss. You know that corrections are normal and commonplace, but you can’t help but feel anxious.
What to understand: HNW individuals often have difficulty getting comfortable with their new financial circumstances. They may relate fluctuations to the past – a correction may result in a paper loss greater than their previous liquid net worth. Others, such as former business owners, may not have been completely aware of their wealth prior to selling their business, but now that they track it regularly, they become anxious.
What to do: Ask your adviser to review statements in person if possible. Establish reasonable expectations and benchmarks when building your portfolio, and discuss performance in percentages, not dollars.
The scenario: You have lunch with a colleague who has a close contact in the energy sector. Based on his insight, you consider opening a large position in XYZ Inc., even though most advisers (including your own) believe valuations in the sector are rich.
What you need to understand: Business owners and executives are used to making quick decisions. Many have developed a keen sense of intuition about opportunities and feel comfortable going with their “gut” when investing. Some may mistrust detailed analysis as “fence-sitting,” or believe a bad decision is better than no decision at all.
What to do: Understand the difference between business decisions and investment decisions – investment decisions require more analysis than instinct. Remember your primary goal: to protect wealth.
The scenario: You feel vaguely uneasy about your portfolio. You call your wealth adviser several times in the same week to ask pointed questions about recommendations – despite the fact that your portfolio is in positive territory.
What to understand: Many HNW individuals find it difficult to relinquish control of their financial affairs. This is especially true of business owners, executives and highly trained professionals.
Because investment performance is largely out of their control, these investors can feel anxious about not being able to affect change, even when there’s nothing “wrong” with their portfolios.
What to do: Discuss big-picture decisions, but leave day-to-day management to your adviser and/or portfolio managers. Establish a partnership with your adviser, rather than treating him/her as a subordinate who simply executes orders.
The scenario: You recently sold your operating business to a former competitor in exchange for a large block of common stock. You want to hang on to this position because you’re excited about the company’s (and the industry’s) prospects. This position represents more than 95% of your net worth.
What to understand: Entrepreneurs are used to keeping the bulk of their wealth in concentrated positions. Many enjoy thinking of themselves as “risk takers.” Many have an intense loyalty to the industry in which they made their money and might be reluctant to move on to other opportunities.
What to do: Emphasize the shift from wealth-building to wealth preservation. Investigate hedging strategies with your adviser and ask for back-tested examples of how they work. •
Thane Stenner ([email protected]) is the founder of Stenner Investment Partners within Richardson GMP Ltd. His column appears every two weeks.