10 Secrets Millionaires are Doing With their Money in 2020
This week, the S&P 500 set an all-time record closing at 3,389.78 as it continued its V-shaped recovery.
At Old Vine Capital, I have seen far too many friends and recently on-boarded clients who went to cash with their investments out of fear in March (despite my Q1 COVID-19 advice.) They have completely missed out on the massive stock recovery over the past 126 days from the bear market that occurred from Feb 19th — March 23rd.
In my daily conversations at Old Vine Capital, I speak with countless multi-millionaire investors in Silicon Valley and across the country each week to discuss how to most effectively navigate multi-asset financial markets and make important life decisions. Here is a list of the top 10 secrets millionaires are doing with their money in 2020:
1: Maximize your company retirement and stock plan benefits every single year. These are automatic “returns” that must be taken advantage of.
2: Set aside at least 6 months of living expenses in cash for emergencies (losing your job, major repairs, and healthcare.)
3: Combine and organize your financial well-being (don’t leave all your old 401(k)s spread around, avoid accidental investment overlap across accounts, and know the right asset allocation across all your accounts — STICK TO IT.)
4: Invest your non-retirement money in tax-efficient strategies that can benefit from tax-loss harvesting.
5: Do not own a mutual fund (these are often over-priced financial products that are sold by commissioned based brokers and completely underperform the markets over short and long-term time periods.). There are some exceptions to this such as index mutual funds or special ESG type mutual funds that can invest capital based on your personal environmental/social views.
“Avoid the urge to “day trade” or to “follow your gut feeling” when it comes to investing.”
6: Invest in lower-cost and tax-efficient separately managed accounts (SMAs) and exchange traded funds (ETFs) (again, not active stock picking managers.) Money saved in management fees goes directly back into the investor’s pocket and long-term compounded growth.
7: Avoid the urge to “day trade” or to “follow your gut feeling” when it comes to investing. Build a long-term investment strategy and stick to it. I see way to many intelligent people in Silicon Valley who think they can “outguess” or “time” the market and “pick hot stocks” or even “trade options” and they are setting themselves up for long-term financial disappointment.
8: Private equity, hedge funds, venture capital and angel investing can be a great place to significantly increase wealth, but this should only be done by larger investors who can risk completely losing this capital. This should not be done with money you are counting on for retire or money from your 6 months of living expense emergency cash savings. The illiquid and opaque nature of these asset classes make it unsuitable for the majority of average investors, but larger clients/investors can benefit from proper due diligence and reporting within the private/alternative investment space.
9: Owning/investing in real estate is a good thing since real estate tends to outperform cash however real estate returns historically have been lower than stocks and the majority of investors fail to calculate the actual total return that includes taxes, interest payments, deferred maintenance, and most importantly, significant time. Real estate is far from a “passive investment.” One benefit is that real estate returns are typically levered since homes are often purchased with borrowed money from the bank.
10: Like gold, silver, oil, and other commodities, cryptocurrency such as Bitcoin is purely speculative. When looked at through the lens of the valuation equation (Present value = current book value + (future cash flow divided by a particular discount rate)), crypto currencies (or gold, etc.) do no create any true future value. To void the “fear of missing out” #FOMO, investors can allocate 5% of less of their liquid net worth into a basket of cryptocurrencies “for fun” and should know they risk it all going to zero or could go up a bit in the long-term.
2020’s investment climate is yet another example for the history books of how it’s impossible to “outguess” or “out-think” markets. My investment philosophy at Old Vine Capital is to focus on what you can control. You cannot control daily market volatility, you cannot control geopolitical events or macro-economics, but you can control your future by building an effective financial plan, prudently saving, and investing wisely.