Is it true that high net worth investors focus only on generating the highest returns? No! The ultra-wealthy focus primarily on risk management. These people are not gamblers.
The old line from Mark Twain — you should be more concerned about the return OF your money than the return ON your money — is very accurate with this group.
The 2003 World Wealth Report (a product of Cap Gemini, Ernst & Young, and Merrill Lynch) showed that during 2002, when the S&P 500 got trashed for 22%, these “high net worth individuals” on average lost only 2.1%.
So, how is it possible that the average investor got slammed — in most cases, for a lot more than 22% — but those folks with more than $1 million in financial assets barely had their first down year — after seven good years?
It’s because they’re conservative and focus on controlling the risk, not focusing on maximizing their return.
Their view is: any advisor we work with must have a discipline that avoids substantial erosion of capital (losing money).
But the typical marketing pitch of so many brokers and investment firms is “we can pick them better than you can.” Without proper risk management, there is no point to that at all.
You can be “right” seven years in a row, but one or two disastrous years can wipe out all the gains you made over that time. That’s exactly what happened to most investors between 2000 and 2002.
Look , you don’t need to shoot the lights out year after year.
Getting consistent positive returns is actually more important than the size of the returns. Don’t lose money, or at the least, keep the losses small! Compounding happens faster with consistent positive returns. That’s the real secret of the millionaire.