4 Investing secrets of the rich

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

To do that, there are some rules you need to follow:


1. Know the costs on your investments - Rich investors focus on spreading their investments at the lowest possible costs. 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.


2. Don't waste too much time looking for the next big thing - Your average investor might spend most of their time trying to identify the next Apple or Facebook. 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.

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 the same. However, when the stock trades at $20, then you have a much better upside potential and smaller risk.


3. Know your risk tolerance - Before making any investment decisions, 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, 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 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.


4. Never panic - Wealthy investors are more likely to take a long-term approach with their investments and ignore “hot” news that can make you invest without thinking.

For example, a lot of rich investors 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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