Investment Strategies from the Uber-Wealthy

Anyone who knows me or reads this weekly column knows that I’m not an avid gambler. I really never have been. Whether we’re talking about a night at the casino or a questionable investment, I believe in taking only measured and calculated risks with money. But will I occasionally slap down two bucks for a lottery ticket when the pot is in the hundreds of millions? Well, you betcha! And yes, I know I have a better chance at being a rock star than winning the lottery. But I understand the odds, and my “investment” in the ticket is occasionally worth the inevitable daydream that comes with the purchase.

So, last Thursday at supper, Sophie and Phoebe were talking about the Powerball lottery because they’d heard a commercial on the radio saying the pot was over $50 million. Sophie thought this was a huge fortune while Phoebe dismissed it, saying that it would be much better to win when it got closer to $500 million or more. It turned into a debate over how much it really takes for someone to be considered uber-wealthy. Heck, they’d both feel uber-wealthy if they won even a tiny fraction of $50 million!

This got me thinking – if you aren’t lucky enough to win the lottery, what are your odds of becoming rich – or at least richer? What really separates the super-rich from the rest of us?

You’ve probably heard the saying, “The rich get richer and the poor get poorer.” In its rudimentary form, I find this statement to be relatively accurate. I say this because I find that the wealthy take the time to get an education in money, personal finance, and investing. They think differently about money than the lower to middle classes. I also find that the wealthier tend to utilize investment strategies that the other folks often don’t.

How can we borrow from the wealthy to become better investors? This week, I would like to spend our time together to discuss a few ideas that I shared at supper with the kids. These ideas circled around strategies that any investor can use to improve their finances and their odds at financial success, whether you have $50,000 or $50 million.

Let’s start with the most basic rule – that is, you have to spend less than you make. I expressed to the kids that you can’t become financially free without having money to invest. While this may be self-evident to you, you’d be surprised how many folks live beyond their means and have little to nothing left over at the end of the month to invest. No matter what, be sure to “pay yourself first”, meaning that you should set aside a certain amount of money for retirement every month, before you pay other bills and expenses. It’s too easy to let bills and entertainment eat up your whole paycheck and by setting aside money for retirement upfront, you aren’t tempted to over-spend in other areas.

Next, and you hear Jen and I say it all the time: you need to have a strategy focused on managing volatility and downside risk. You need to have a long-term investment plan that allows for your goals and risk tolerance and then stick to it.

In fact, an annual study of investors conducted by DALBAR, the nation’s leading financial market research firm right here in Boston, found one of the primary reasons why small investors fail is due to their investment process, or lack thereof. The DALBAR study also found that most small investors make investment decisions based on their emotions, perceptions, or instincts about the market. We find that it is this lack of process, or more importantly a lack of understanding about explicit and inherent risks, that often leads individual investors to fall into the all-familiar cycle of buying high and selling low.

Another key factor is that ever-important investment strategy: diversification. I could see a bit of confusion on my 16-year-old twins’ faces, so I dove in a bit deeper. You see, if a portfolio is focused on very few stocks or sectors, any movement in those few stocks or sectors can lead to dangerous volatility, like many saw last year. This inherent risk associated with a lack of diversity can decimate an investment strategy if those few sectors fall out of favor with the general markets. The rich, however, are much less likely to put their money into single stocks like Apple or General Electric; they tend to be much more diversified in many different stocks in a variety of sectors.

It’s also crucial that you understand the practice of rebalancing your portfolio. Through consistent rebalancing, you can ensure your portfolio remains adequately diversified and proportionally allocated. However, what I’ve found is that even if some investors have specific allocation goals, they often do not keep up with rebalancing, allowing their portfolios to skew too far one way or the other.

For the ultra-wealthy, rebalancing is a necessity. They can undertake this rebalancing quarterly, monthly, or even weekly, but the wealthy rebalance their portfolios on a systematic basis. For the people who don’t have the time to rebalance or the money to pay someone to do it, it’s possible to set rebalancing parameters with investment firms based on asset prices.

I explained to Sophie and Phoebe, that as they proceed through life, don’t waste time and money keeping up with the “Joneses”. Many smaller investors are constantly looking at what their peers are doing, and they try to match or beat their investment strategies. However, not getting caught up in this type of competition is critical to building personal wealth.

The ultra-wealthy are good at not comparing their wealth to other individuals. This is a trap that many non-wealthy people fall into. Rather than trying to chase the competition or becoming scared of the inevitable economic downturn, the wealthy stay the course. They also avoid the desire to purchase a new Range Rover just because their neighbors are buying one. Instead, they invest the money they have to compound their investment returns and further increase their wealth.

Let’s put it all together – wealthy folks, for the most part, will live within their means. They understand the importance of diversification and rebalancing. They incorporate a systematic process to managing their wealth to include a diversified portfolio, backed by strategies that use facts, logic, and quantitative data, to help manage risk. Through efficient and effective risk mitigation strategies, we can potentially take advantage of gains and minimize losses. Folks, this can be the difference between making money, and losing money, in a market as volatile as we’ve seen since 2000.

So, folks, what’s your process?

While you probably won’t win the lottery, you can utilize investment strategies to help you earn similar investment returns as the rich and famous. Take a look at your process, live within your means, understand your inherent and explicit risk factors, define your goals, and stick to an investment system that helps to protect you and your financial future.

Be vigilant and stay alert, because you deserve more! Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at

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