How Do the Rich Invest Their Money?
It’s a well-known fact that a small percentage of people control the majority of wealth in the United States. But all investors can take cues from high net worth individuals when it comes to investment and money management. Here are four ways to invest like the wealthy and hopefully get richer in the process:
1. Utilize a financial services company or a financial advisor
About 70% of high net worth individuals work with financial services companies or a financial advisor and many spread their assets across multiple firms and financial advisors, according to a Cisco Internet Business Solutions Group Study. But financial advisors are not for millionaires alone. You might even argue that the less money you have the more help you could use! And the average person’s options for advice are growing.
- There are real life people – financial advisors – some of whom serve clients of average income. Best of all these advisors have a variety of fee structures and ways to work with people of varying degrees of wealth.
- There are a variety of new-ish online investment advice companies that have automated the kind of highly sophisticated wealth management practices that are used by the wealthy. The online advice is usually free or offered at a low fee.
2. Diversify your portfolio
Wealthy investors don’t just pick one or two stocks as an investment. Instead, they tend to spread their wealth across a mix of traditional and nontraditional asset classes. Stocks, bonds, and mutual funds are among the traditional asset classes, but many investors also look to alternative asset classes such as real estate, private equity, and commodities.
Individuals should take advantage of the entire investment spectrum, urges a UBS report on non-traditional asset classes. “…non-traditional asset classes such as hedge funds, real estate, commodities and private equity are all too often neglected,” says UBS. “This is unfortunate, because the inclusion of non-traditional asset classes can enhance portfolio performance.”
Real estate is a popular alternative asset class to invest in, and 77% of investors belonging to wealth and asset management firm Spectrem Group’s Millionaire Corner recently reported real estate ownership. About 35% of Spectrem’s millionaire clients invest in real estate investment trusts, while 34% own collectibles, 28% own precious metals, and 27% have private equity investments. Other nontraditional asset classes the millionaire investors have interest in include private real estate funds and hedge funds (16% each), and venture capital (13%).
Many money managers believe that the more asset classes you introduce into your portfolio, the less risk and better your return. “The Wealth Report Attitudes Survey,” states that the very rich keep their money invested in a mix of asset classes. Looking at averages, the rich roughly have their money distributed like this:
- Property — 23%
- Equities — 21%
- Bonds — 21%
- Gold – 3%
- Commodities – 2%
- Currencies – 3%
- Cash – 15%
- Other – 12%
So, if you have $1,000, $230 would be invested in real estate, $210 in stocks, $210 in bonds, $30 in gold, $20 in commodities, $30 in currencies, $150 in cash and $120 in other.
While some alternative investments like hedge funds and venture capital may not be available to you, there are funds and other entry level ways to invest in things like real estate, commodities, gold and currencies. A financial advisor or an automated online service can help you achieve investment diversification.
3. Rebalance your investments
Rebalancing is the process of buying and selling assets to maintain your desired allocations in different types of investments. The rich regularly rebalance to maintain their desired mix of asset classes.
For example, if they lose a lot of money in stocks and earn a lot of money in gold, then they might reallocate funds – selling some of the gold and buying more stocks to return to their desired asset mix. Rebalancing can help you stick to the rule of buying low and selling high.
4. Plan ahead for financial risks
While high net worth individuals may not have to worry as much as the average person about having enough money in retirement, the majority do still have financial concerns about their golden years.
More than half (55%) of the mass affluent fear not having enough money in retirement, according to Merrill Edge Spring 2014 Report on the financial concerns, priorities, and behaviors of mass affluent customers, defined as U.S. households with investable assets ranging from $50,000 to $250,000.
In fact, unstable retirement trumps other common fears, such as public speaking (cited by 27% of Merrill Edge survey respondents) and losing a job (37%).
A strong plan and good use of insurance products can help protect your retirement finances from risks.
How Are You Planning?
Working with a financial advisor to maximize your investments and to plan ahead for longevity, long-term care and other out-of-pocket healthcare expenses can help create a secure retirement. Not ready to work with someone, use an online retirement calculator for another perspective.