4 Costly Errors That High-Income Earners Make
By Daniel Baumgartner & Petra Peters
Investing in the U.S. can be an excellent opportunity for Europeans and U.S. citizens living abroad to diversify their investment portfolios and take advantage of the U.S. economy. At Terra Nova Asset Management, we specialize in working with international clientele, and with over 20 years in business, we have the experience necessary to build financial strategies customized to your unique goals as a high-net-worth individual from Europe or the U.S.
Though our clients are often highly educated and earn sizable incomes, there are a number of common financial mistakes they make that can cause damage to their long-term investment portfolios. In this article, we’ll explore the top 4 financial mistakes high-income earners make and what you can do to avoid them.
1. Investing On Your Own
Investing on your own can be tempting, especially for high-income earners who may feel confident in their financial knowledge and skills. However, it’s important to consider the potential risks and drawbacks that can come from DIY-ing your portfolio.
Without professional guidance, you may make impulsive investment decisions or overlook important factors that could impact your investments. You may also lack access to institutional pricing and other investment opportunities or resources that an experienced advisor can provide.
Working with an investment advisor who specializes in cross-border investments can provide high-income earners with the expertise and support they need to make informed investment decisions. An investment advisor can help you assess your risk tolerance, set achievable goals, and create a customized plan that aligns with your financial objectives.
2. Not Diversifying With Alternative Investments
Another mistake we see high-income earners make is sometimes they don’t realize the degree of diversification needed for their often complex investment portfolios. It’s one thing to know in theory that investment diversification is a key strategy, but it’s another thing to follow through by staying on top of your portfolio and utilizing alternative investments when possible.
Alternative investments are assets that aren’t part of the conventional investment types (stocks, bonds, and cash), and they include things like real estate, private equity, hedge funds, and commodities. In general, the purpose of an alternative investment is to behave differently from stocks and bonds, adding value to your portfolio through diversification and risk reduction.
Since most alternative investments have low correlations with standard asset classes, they can smooth portfolio volatility. Hard assets (like real estate, timber, oil, and gold) may have an inverse relationship with stocks and bonds during periods of higher inflation. Because of these differences in behavior, including them in your portfolio is a great way to manage risk by acting as a buffer against the inherent volatility of the market.
3. Not Utilizing Tax-Advantaged Accounts
High-income earners often miss out on significant tax benefits by not taking full advantage of tax-advantaged accounts. High-income earners may overlook the benefits of these accounts because they can afford to invest in other ways (e.g., alternative investments, business interests). But investing on a tax-deferred basis can be a great complement to your overall investment strategy by allowing you to save money on taxes and invest more funds that can grow over time.
Accounts such as 401(k)s, IRAs, and HSAs, work well for high-income earners who have income sources in the U.S. For those living and working abroad, consider exploring ISAs, personal pension plans, and retirement savings accounts. The exact rules change depending on your country of location and specific account type, but in general, contributions to these accounts are made with pre-tax dollars, meaning that they can lower your taxable income in the current year. Additionally, earnings on investments within these accounts grow tax-free until withdrawals are made, which can provide significant tax savings over time.
4. Trying to Time the Market
Lastly, trying to time the market is another financial mistake common amongst high-income earners. Despite the unprecedented times we’ve been experiencing over the last three years, the basic principles of the market still hold true. First and foremost: timing the market doesn’t work. There is no way to predict short-term fluctuations with enough accuracy that you can consistently make the right decision about when to buy and when to sell.
It’s normal to feel worried when you see your investment values fall during volatile times, especially for those who have significant portions of the wealth at work in the market, but one of the biggest mistakes you can make is to sell your investments entirely. When you do this, you’re locking in the low value of your accounts instead of letting them rebound before you withdraw.
In fact, over the last 15 years, the fully invested individual would have earned over $24,000 more than someone who missed the 10 best days in the market. Since no one can predict when those “best days” will be, it’s better to build an investment plan you can trust and stick to even in volatile times. This is our goal for all our clients.
Don’t Let Common Mistakes Undermine Your Portfolio
Are you an international investor looking to get involved in the U.S. economy, or a U.S. citizen living abroad? Do some of these mistakes sound familiar to you? The good news is that you don’t have to let common financial mistakes undermine your long-term investment potential. At Terra Nova Asset Management, we can guide your investment strategy and help you avoid the common financial pitfalls along the way.
If we seem like a good fit for your investment needs, reach out to us directly at 212-355-1234 or ppeters@terranovausa.com for the New York office (Petra) or 855-248-6630 or baumgartner@terranovausa.com for the New Jersey office (Daniel). You may also contact us here to schedule a meeting and we’ll get in touch with you soon!
About Daniel
Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust.
Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscape, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”
About Petra
Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.
Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.