5 investing secrets of the wealthy

Characteristics of a 401(k) millionaire
Characteristics of a 401(k) millionaire

Just because you can't afford the lifestyle of the super rich doesn't mean you can't invest like them.

"Money doesn't guarantee you are a better investor than someone with less money," says Mindy Rosenthal, president of the Institute for Private Investors, which provides wealth management education to those who have at least $30 million in investable assets.

There's a perception that high net worth clients are mostly in private equity and hedge funds. Not true, says Scott Keller, a principal at Truepoint Wealth Counsel.

"The costs associated with those investments are tremendous. We do not feel those are necessary investments," Keller says. "Traditional asset classes have always rewarded investors over the long term."

So how can regular people invest like the rich? Financial advisers shared the following tips:

1. Know the fees on your investments. High-net worth investors focus on broad diversification at the lowest possible costs, said Keller. Actively-managed funds tend to carry higher fees, but don't always outperform the market.

Make sure to know any fees and taxes associated with investment choices before committing to them, he recommends. "Cost needs to be at the forefront of the decision-making process, they can really eat away at returns, which no one wants no matter their income level."

To be more tax efficient, Rosenthal said high net worth investors look for portfolios that don't turn over frequently.

Related: how much are 401(k) fees costing you?

2. Don't waste too much time looking for the next big thing. "Your average investor might spend the bulk of their time trying to identify the next Apple (AAPL) or Facebook (FB)," says Keller. "Our high-net worth clients spend less time on that and instead focus on wanting to own the whole market and use a low-cost index."

Weyman Gong, principal at family wealth advisory firm Signature, which works with individuals with investable assets of at least $20 million, advises looking for cheap stocks.

"It is unlikely for [wealthy clients] to purchase when the stock trades at $40 because they will have $40 at risk and the upside and downside are symmetric. However, when the stock trades at $20, then you have a much better upside potential and smaller capital at risk," he says.

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investing secrets

3. Know your risk tolerance. Before making any investment decisions, Rosenthal said wealthy investors know what they will need the money for and how much they can afford to lose. "Set the number you need to have at the end of the year to make you sleep at night."

Once investors know their end goal, they can choose appropriate investments. For instance, she said if a wealthy individual had $10 million to invest and needed $8 million at the end of the year, that person will look to put 80% in relatively safe investments and 20% in more risky growth-generating investments.

The same principle applies at any investment level.

"You get more money for taking more risk, that's how it works, but you need to know what you are comfortable with losing. It is risky to keep all all your money in cash or cash equivalent if you need to earn 8% or 9%, you can't earn that with those options," she says.

Related: Get your assets in gear. Find the right portfolio mix for you

4. Unsexy stocks can be very hot. Just because a company makes headlines every day doesn't make it a good investment, says Doug Lockwood, branch president at Hefty Wealth Partners.

When it comes to picking stocks, he advises clients to look for companies with at least a $50 billion market cap, a dividend yield that's around two times higher than the S&P 500's dividend yield and balance sheet liquidity among other things. He says the current ratio, quick ratio and working capital calculations are useful to evaluate a company's fundamental health.

Examples of stocks that meet this criteria are found in industries used in everyday life: autos, big pharmaceuticals and fuel, he said.

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5. Never panic. Wealthy investors are more likely to take a long-term approach with their portfolios and ignore Wall Street's daily gyrations that can trigger knee-jerk investment decisions, says Rosenthal.

"They stayed in the stock market in 2008 and were then greatly rewarded as just last year the market was up 30%. You have to be brave."

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