7 Red Flags for Millionaire Investors
Written by
G. Brian Davis
Edited by
Amber Barkley
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High earners make investing mistakes, just like everyone else. The difference? More service providers try to sell them on “the next home run investment.”
As someone who’s seen enough success to build a seven-figure net worth, watch out for the following red flags in your investing decisions.
Scams Targeting the Rich
The rich have more money to lose, making them juicy targets for scammers.
Watch out for anyone offering an investment that sounds too good to be true. Yes, it’s possible to earn high returns with lower or moderate risk — but those typically come with other downsides, such as no liquidity, a long time commitment and a high minimum investment. Even then, stick with investments you can verify.
Start by asking a simple question: Do I know and trust the person recommending an investment? If not, did someone I know and trust refer me to them? At a bare minimum, what do verified other investors say about them? What’s their reputation in the industry, and how long have they been operating?
Only consider investing advice from people you’ve verified in a compelling way. And when you try a new investment, follow the old maxim of “start low and go slow.”
Investments That Make Your Advisor Money — Not You
Not all scammers claim to be Nigerian princes. Some wear business suits and boast letters after their name.
Investment advisors sometimes take advantage of naive clients with deep pockets. After convincing them to pay a percentage of their portfolio in exchange for managing it, some unscrupulous advisors put their clients’ money in expensive or inappropriate investments that provide some kind of kickback or commission to them.
There’s nothing inherently wrong with hiring an investment advisor to manage your portfolio. Some may even be worth paying 0.5% to 1% as an annual fee. But as a general rule, hire these advisors to manage risk, not to try and beat the market.
Watch out for any advisors who try to pitch you on picking stocks or beating the market.
Overpaying Advisor Fees
In today’s world of passive ETFs and index funds, you can match the market’s returns by investing in just a few funds, with extremely low expense ratios.
Don’t know where to start? Try investing in the Vanguard Total Stock Market Index Fund ETF (VTI) for broad U.S. stock market exposure or the Vanguard FTSE All-World ex-US ETF (VEU) for international stocks.
Or just use a robo-advisor. Charles Schwab offers one for free that includes bells and whistles like tax loss harvesting and automated rebalancing.
Hubris When the Market Does Well
Successful people didn’t get that way by being fools. But success and cleverness in your career doesn’t automatically make you a clever investor.
Jeremy Savory, CEO of tax consulting firm Millionaire Migrant, sees this mistake all the time among his millionaire clients. “The biggest red flag in my experience is ego. I always tell my clients, ‘Hubris is your nemesis.'”
Just because the market and your investments do well doesn’t make you an expert. Don’t jump into the next shiny investment opportunity that comes your way assuming that everything you touch will turn to gold.
Managing partner Richard McWhorter at SRM Private Wealth pointed to fear of missing out (FOMO) as a recurring theme among his wealthy clients. “FOMO has been the biggest ongoing problem for investors who do not understand the risks that are involved in an investment.”
Panic When the Market Falls
Greed drives poor buying decisions. Fear drives poor selling decisions.
Sometimes the stock market falls 50% or more, and fast. It can instill terror in otherwise calm investors. But wise investors stay the course and don’t panic sell.
“Too many of my clients view the stock market as a lottery ticket to increase their net worth,” explained Stuart Schiffman, CFP and founder of Compound Wealth Advisors. “Unlike a casino where the odds are never in your favor, stock market returns have historically had significantly more up years than down years.
“If my clients can commit to the stock market through thick and thin years, they will achieve greater returns than trying to time the market or pick the next Apple.”
Only invest money in stocks that you can stomach seeing fall in value. Put money that you can’t bear to see dip into less volatile investments.
Overconcentration
Your mother always told you not to put all your eggs in one basket. Look no further than the investors who lost enormous sums when Enron went from investors’ darling to pariah virtually overnight for a reminder why.
Savory watches this play out with many of his clients who earned money in one sector and remain overexposed to it. “Many previous crypto millionaires ‘HODLed’ too long and then got wiped out. Or growth stock investors didn’t diversify into cyclical and suffered a crash right before retirement.”
For that matter, many successful employees get stock options from their companies. But over time, they make up a huge percentage of their net worth. If that company goes under, they lose not just their job but a massive portion of their wealth.
Don Epperson, founder and CEO of family office platform Annise recommended that millionaires start thinking beyond paper assets like stocks and bonds. “As you build wealth, consider expanding your assets to include real estate and private investments.”
Golden Visa Programs
Many millionaires start looking into a second citizenship abroad, often to lower their tax bill.
But citizenship by investment, or “golden visa” programs, require six- or even seven-figure investments, usually in countries where you wouldn’t have chosen to invest otherwise. And to stop paying U.S. taxes, you have to actually renounce your U.S. citizenship — which you probably aren’t prepared to do.
Even if you are, many of these programs come with hefty risks.
“Not all golden visa programs are created equal,” said Mark Damsgaard, founder of visa and migration agency Global Residence Index. “Fraudulent agents, unverified investment projects and political instability pose significant risks to high-net-worth individuals. Watch out for red flags such as unrealistic promises, unregulated or unofficial programs, and high fees with no transparency.”
If you’re truly interested in living abroad and paying lower income taxes in the U.S., you don’t actually need a golden visa. You just need a residence permit, which many countries offer relatively easily. The foreign earned income exclusion makes your first $130,000 — $260,000 for couples — of income tax-free if you spend most of the year overseas.
Millionaires have more to lose than the average person. Earning wealth makes a great first step — now you need to protect and keep it.
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