The Investment Mistake That Could Get You Booted From The Upper Class

We may receive a commission on purchases made from links.

Building up wealth, and joining the upper class, generally features highly on the mental to-do list of people everywhere. Saving up money with the help of investment assets, like the stock market, can assist in delivering this kind of financial mobility — although it certainly helps to earn a heap of money every year to kickstart your progress. But, what happens after you achieve this financial breakthrough? Unfortunately it is possible, and perhaps even likely in some cases, to succumb to an investment mistake that can see your fortunes nosedive.

In a Money Digest-exclusive conversation with Jason Brown, a stock market expert at TheBrownReport.com, and the author of "Five-Year Millionaire," Brown discussed a common issue that can work its way into the portfolios of high net worth investors, a lack of diversification. He explained, "I believe many upper-class investors fail to diversify because they become comfortable and overconfident in one sector especially if the majority of their money was made in a certain sector." He also added, "They may think why go anywhere else, why learn a new industry or investment vehicle? That overconfidence can be a blinder to potential risk and headwinds coming for an investment that used to work and perform just fine." Indeed, portfolio diversification is a common thread among those best-prepared to weather events like market corrections. Diversification can be crucial to long term success, but it's more than just a catchy buzzword. In fact, Brown offers some specific suggestions for investors to ensure stability.

The stock market — and really the investment marketplace as a whole — isn't immune to shocking changes that can upend the status quo. Jason Brown notes that if your portfolio lacks diversification you can become susceptible to "significant risk in market downturns mainly because [your] money and investments are concentrated in one or a few vehicles that have performed over time. The problem is if, for example, it took 30 years for that asset class to perform and there is a regulatory change, industry crisis, or company that stops innovating you could lose 30 years' worth of growth and gain."

A changing marketplace introduces brand new layers of potential benefits and challenges to brands. Some are able to adapt and thrive while others struggle to maintain their footing. "You likely do not have another 30 years to wait for a new investment or industry to mature," Brown adds. "Even worse," he says, "if the downturn starts to not only erode years of profit but starts to eat away at principle, the exposure could be more detrimental if you are past your peak earning years to add more investment capital." Asking a few key questions can help here. Brown notes that investors should consider whether any single position in their portfolio has the ability to wipe out the majority of their total wealth should the company or industry suddenly experience a change.

It's not enough to spread your investments out across multiple companies or market sectors. Finding your way into a variety of investment options involves more than just a larger number of distinct assets. Conventional wisdom suggests owning shares in 20 to 30 individual companies, although buying into broad index funds can also do this work for you. A broad approach is a good start, but you'll want to focus your investments into owning unique assets, too.

Jason Brown warns that those "only invested for growth but [lacking] an investment plan to protect the growth they already have and maybe stave off inflation" will quickly see their growth wither in the event of widespread market changes. "The benefits of diversification can sometimes disappear during a market crisis," he warns, "because of the inherent nature of the word crisis which... has the ability to take down almost all asset classes even diversified ones that are not directly related to the crisis." 

Investing in slower moving assets that protect against the excesses of loss that tend to dent value within the technology sector or service industry can help limit the bleed. One feature of a well-diversified portfolio is the humble bond. Bonds aren't always particularly exciting, and they don't bring back a major windfall when they mature in comparison, but they do deliver guaranteed payout rates as long as they are held until their maturation date. This makes them a powerful counterbalance to more speculative investments.

Jason Brown highlights a few key examples that can provide a guidepost for the kinds of problems that high net worth investors sometimes face. He notes that "upper-class investors [should] take a hard look at their financial goals and their investment holdings roughly every 5-10 years and ask the important questions" that will help them protect their wealth.

Brown focused on Enron in particular. "Employees and executives and investors saw their life savings vanish overnight when the company collapsed due to accounting fraud. There was also the Real Estate Market Crash of 2008 where many upper-class investors were overleveraged in real estate or private lending." Overextending into an asset that looks like a sure thing is an easy mistake to make. Both of these examples presented stability on the outside, but for those who took that as gospel and pumped all their capital into the investment, there likely wasn't much left for other, safer investments when it came time to pick up the pieces. 

Brown also noted the Ponzi scheme run by Bernie Madoff, and the dot-com bubble that ultimately burst. At the end of the day, no investment, asset class, or company is entirely safe from shifting market conditions, economic changes, or even lies standing at the foundation of a seemingly visible success. Diversification can protect you and your money from the inevitable corrections and implosions that can come for any investment, no matter how stable it might appear in the present.