Amassing wealth isn’t supposed to be easy, but a lot of Americans sure are good at it. In fact, last year the United States added 379,000 new millionaires to the ranks according to a report from UBS. That adds up to more than 1,000 a day.
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The next challenge for all these newly minted millionaires is growing and protecting their wealth, so they never have to worry about losing it. Unfortunately, plenty of rich people lose their fortunes or prevent them from growing because of unwise financial and investment decisions.
Here are four common mistakes the newly wealthy make when investing their money.
Successful investing involves more than just picking the right variety of asset classes. You also need to invest in a way that makes the most financial sense, which means paying special attention to the tax implications.
Failing to adopt tax-efficient strategies can “erode wealth over time,” according to a blog from Avidian, a Texas-based boutique investment firm. For example, it explained that some investors who have large dividend-paying stock portfolios often overlook the tax implications of the dividends.
“Without proper tax planning, they could face a substantial annual tax bill, diminishing the overall return on their investments,” Avidian noted.
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The newly wealthy don’t always follow the same model as their older peers — especially now, with so much money pouring into cryptocurrency, real estate, private equity and business startups rather than stocks and bonds.
“The desire to push 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 on social media tell me that [traditional investing advice] isn’t the way it’s done anymore. Everything’s changed.”
The problem is, ignoring conventional wisdom often means you’re not doing enough to ensure long-term financial security. “When it comes to some of the tried-and-true approaches to investing, it really is a long game,” Klontz said. “And when I hear people talk about crypto and alternative assets, that’s much more of a short-game mindset.”
One thing you can depend on when you first find yourself with a lot of money is that friends, associates and even family members will offer you a chance to invest in their businesses or enterprises. You need to be very careful here, though.
