Why HNIs end up being poor equity investors

Family offices, ultra-HNIs, and business owners are some of the most sought after clients by mutual funds, wealth management outfits, banks, and independent advisors. The cost and time of servicing a wealthy and super-wealthy customer are pretty much the same; therefore, a large part of the industry is focused on acquiring large and affluent customers.

Having managed wealth for clients (big and small) in various parts of the world - I have learned that higher-income does not correlate with higher investing success. Let’s explore the reasons why this is so:

Over-confidence

Capital allocation, whether it be buying new factories, acquisitions, or starting new companies, is a high risk, high return endeavor, and successful business owners are masters of this.

This confidence over capital allocation in business ends up reaching capital allocation in investing too. Large business owners feel they can predict future trends, invest in risky initiatives, and maximize returns. Unfortunately - it’s been proven that it’s almost impossible to predict future trends (at least not consistently). Market timing is the investor’s biggest enemy, and large business owners are also not immune to this behaviour.

Too much process

Lengthy monthly portfolio reviews, rebalances, mutual fund churn, short-term outlook analyses, global macro, etc. are familiar for many in the Ultra-HNI segment category.

Everyone is well-read on greats such as Warren Buffett, Peter Lynch, and John Bogle, but very few actually follow it consistently and over time. Most people don’t realize that Warren Buffett’s wealth is more to do with his age than his investing skills. He the product of 80 years of compounding. A strategy is essential, but it is more important to wait for the plan to play out over the years. No strategy is perfect - but it can be made good enough by merely waiting and staying put.

Liquidity mistiming

Business owners, unlike salaried individuals, do not get a fixed monthly income. Their incomes are based on the performance of their respective businesses. In a positive economic cycle, business owners can expect profits to increase manifold, whereas, in negative cycles, they can be subject to stress on working capital and cash flow.

Therefore, a business owner who is diligently investing will over-invest in good times (bull markets) and under-invest during bad times (bear markets). This behavior will lead to below-average outcomes.

Prefer complexity

A simple diversified mutual fund is perhaps too simple for a sophisticated investor. But in terms of effectiveness - history shows that simple products end up being very effective in terms of risk-adjusted returns.

Lots of investors love the sound of exclusive products and complex products. Unfortunately, many of these products do not end up delivering over the future or do it while taking excessive risks. Not all of them are bad - but ideally, investors looking to invest for decades should consider simple products too.

Multiple advisors problem

An average wealthy investor in India has a minimum of 2-3 wealth advisors. This number has fallen to just one in developed countries like the US and the EU. Having multiple advisors can sometimes cause a tremendous amount of conflict and poor decision making. Why?

Investors who allocate a part of their wealth to multiple advisors end up starting a rat race to deliver the best performance. As a result - there may be poor short-term decisions or risk-taking behavior, which may not be aligned to the client’s risk profile.

In conclusion, - a smart, wealthy investor should keep in mind the above points to ensure financial success. In investing - what not to do is sometimes more important than what right to do. The power of compounding and refraining from foolishness is essential for long-term investing success