Even if you’re not yet in the category of affluent individuals, these strategies for long-term investment, efficient tax management and more can guide you toward becoming one.

As a financial consultant for affluent individuals, I emphasize to our clients that investing is a single facet of their comprehensive financial planning.

An affluent individual is generally defined as someone with liquid assets amounting to a minimum of $1 million, and it’s noteworthy that the U.S. has the highest number of such individuals globally.

I wish to highlight five critical areas for affluent investors to concentrate on, although this only covers some things. Personal circumstances and goals vary widely. Also, a significant portion of what follows is familiar to affluent individuals. Many of these considerations apply to those embarking on their journey toward affluence.

If accumulating substantial liquid assets is your aim, scrutinizing these areas is an excellent way to assess if you’re on the right track toward financial security.

Investment Diversification and Long-term Approach 

We often hear tales of a single investment yielding substantial returns in a short span. For instance, someone who bought Nvidia stocks when they dropped significantly last year would have seen a massive gain recently. Concentrated investments can yield significant returns, but they also carry substantial risks.

When starting your saving and investment journey, you can concentrate your investment funds, such as creating a business or investing in a few sectors. You would have time to recover from a setback or significant loss without endangering your long-term financial stability.

Many affluent individuals have reached a point where a significant financial setback could result in large dollar losses that would take a substantial amount of time to recover. For example, if someone nearing retirement loses 50% of their $1 million portfolio, they would need to regain somehow the lost $500,000, which is daunting.

Contrarily, a person just starting their career who invests $10,000 and suffers a 50% loss should reasonably be able to recover the $5,000 over their working lifetime.

Affluent individuals should consider extensive diversification and maintaining various types of investments in their portfolios to mitigate this kind of risk. This practice doesn’t guarantee complete avoidance of downturns, but it’s an excellent measure to prevent permanent capital loss.

Additionally, investment should always be approached with a suitable timeframe in mind. Investing in stocks, bonds, and alternatives usually requires a minimum investment period of three to five years, often even longer.

Risk management is also an integral part of diversification and long-term investing. Certain stages in a person’s financial life are more vulnerable to significant setbacks which can disrupt their financial goals. Hence, portfolio risks must also be managed appropriately.

Effective Tax Management 

Adding a tax professional to their advisory team is essential for affluent individuals. This expert can assist in preparing tax returns, advising and developing strategies to ensure you exploit opportunities within the tax code. A more complex tax return is often the case for people on their journey to becoming affluent rather than for those who are already there.

Being cognizant of your tax situation and the impact of various investment strategies from year to year is vital.

For example, placing tax-inefficient investments in accounts that defer taxes for some time can be beneficial. Or, you could assess if you’re in the right tax bracket for Roth conversions from your pre-tax accounts (like IRAs and 401(k)s). While investment decisions shouldn’t be solely tax-driven, being tax-aware can help avoid unnecessary tax payments.

Insurance and Risk Mitigation

Affluent individuals must have suitable insurance for different scenarios to protect their portfolio from unexpected expenses.

Typical insurance policies include auto, home, and umbrella coverage. Ensuring that absolute risks are adequately covered is crucial. For instance, underinsured homes or cars could result in tapping into your portfolio to compensate for any shortfall.

Additional coverage through umbrella insurance can protect your financial assets from large claims that exceed the maximum limits of auto and home policies. Regularly reviewing your insurance needs ensures you have the right level and type of coverage.

You should also consider life insurance to cover future earnings or significant future expenses if you pass away unexpectedly.

Health insurance is also essential, particularly as medical expenses increase with age, potentially straining your portfolio if not adequately insured.

Estate Planning 

Estate planning may not be enjoyable as it deals with arrangements for when a person passes away or becomes incapacitated. Nevertheless, it is necessary and should be personalized according to the individual’s state of residence laws.

Affluent individuals often use this area to mitigate potential federal estate taxes. Having the correct documents in place is crucial so your family is aware of your wishes and isn’t left at the court’s mercy to decide what happens to your assets.

Given that laws and tax codes change, you must regularly review your estate plans to ensure they align with your current circumstances and wishes.

Financial Planning Finally, creating and maintaining a comprehensive financial plan encapsulates the abovementioned points. It’s a process where advisers attempt to predict future needs and liabilities and match them with financial resources.

Regular financial planning can help you stay on track or identify areas that need attention before they escalate into problems.

If you’re working towards retirement, it helps outline strategies you should consider before you reach that stage. Many people have a target retirement age and want to know what it will take to achieve that goal confidently.

While the future will always have uncertainties, a robust financial plan provides a roadmap with adjusting options.

While it might seem daunting to focus on all five areas at once, establishing a strategy for each over some time is a good starting point. A financial adviser can help prioritize each location and decide when to review them as circumstances change.

This process helps identify what’s important to you and your family, including charitable giving.

Although investing is often the primary focus for affluent individuals, it’s equally crucial to discuss and consider other areas to help achieve your goals.

The journey to becoming a high-net-worth individual requires more than just making wise investments. It involves comprehensive financial planning that covers risk management, tax efficiency, insurance coverage, estate planning, and more. These financial strategies are not solely for the affluent but are also valuable for those aspiring to build significant wealth. By paying attention to these areas, you can navigate the path to financial success and peace of mind.