New Study Reveals How the Wealthy Invest

There is no shortage of material out there that tries to unravel the mysteries of getting rich. Habits of the wealthy have always been a hot topic.

On average, the portfolios of the wealthy are heavily weighted toward equities, which make up 53 percent of assets. The remainder is largely divided amongst bonds (15 percent), cash (11 percent) and CDs/money market funds (9 percent). Real estate, excluding the primary residence, comprises just 6 percent of their net worth.

Over the long run, stocks outperform most other asset classes. It makes sense to hold the majority of one’s wealth in equities, while allocating a smaller portion to less volatile assets in case of an emergency. Although many millionaires have made their fortunes in real estate, it’s an asset that requires maintenance and management.

Take it from the best: Warren Buffett’s will dictates that 90 percent of his wealth be invested in stock market index funds when he dies, with the remainder in government bonds.

Unsurprisingly, the wealthy approach investing differently than most people. Rich investors listen to financial advisors, ignore irrelevant noise, don’t worry about how their peers are doing, and remain calm during turbulent times. They’re also confident in their own knowledge and instincts.

Deciding Factors

The rich place the most emphasis on professional financial advice, with one-third of respondents listing recommendations from a financial advisor as an important or very important factor. Even the wealthy turn to financial planners to help them manage their assets.

Other important investment considerations for the wealthy include time until retirement, personal experience in the stock market, and the risk of a rare disaster (such as a market crash).

Ignoring the Noise

The wealthy are also adept at tuning out meaningless noise. More than 90 percent of millionaires responded that they ignore tips from the media and advice from family/friends.

Keeping Up With the Joneses

Unlike most people, millionaires don’t care about keeping up with the Joneses. More than 94 percent of those surveyed listed the “desire to become wealthier than other rich people” as a non-factor. When asked about “the difference between my current material standard of living and the level everybody else around me has experienced recently,” only 6 percent of the rich named it as an investment consideration.

Among the general public, though, 16 percent admitted being influenced by peer performance.

Loss Aversion

Loss aversion was first identified by Nobel-winning psychologist Daniel Kahneman and the late Amos Tversky. Kahneman’s definition of the concept is that “response to losses is stronger than the response to corresponding gains.”

In other words, the pain of losing money is greater than the pleasure of gaining money. The prospect of an investment loss often leads people to do dumb things during a market panic, such as selling their stock at a low point.

The rich are less prone to acting on loss aversion. Just 7 percent agreed that “even small losses on my stock investments makes me worry.” Among the general population, however, 28 percent agreed with that statement.

Investment Knowledge

The wealthy trust their own financial management abilities. Less than 11 percent reported “lack of knowledge about how to invest” as a factor in their decisions, while 36 percent of the general population admitted that they didn’t know what they were doing.

When the wealthy do pick individual stocks, they focus more on the profitability of the underlying company. Millionaires also display a higher degree of portfolio concentration.

Stock Characteristics

Overall the rich tend to eschew “momentum” stocks, viewing them as having lower expected returns and higher risk. They also shun stocks that require high investment expenditures for the same reasons.

Instead they opt for the most profitable companies, which they see as having higher expected returns and lower risk. The wealthy perceive value stocks as the least risky, but also as having lower expected returns.

Less Diversification

Millionaires are also more likely to shy away from diversification; 15 percent of respondents reported having more than 10 percent of their net worth in a single stock. Nearly half of respondents believe that their stock-picking offers better prospects for superior returns. A quarter of millionaires also cited a personal or family association with the company as an important factor.

Investors with great track records of success such as Warren Buffett and Peter Lynch frequently warn against excessive diversification (or “de-worsification” as Lynch calls it). Buffett and Lynch instead concentrate their holdings in a few individual companies that they know extremely well. They don’t dilute their best investments with mediocre ideas.

Although you may not have $1 million in assets (yet), you can invest like a rich person in order to become rich yourself. Weighting a portfolio heavily toward equities while keeping a smaller portion in more liquid, less volatile assets is a common sense approach.

Adopting a wealthy mindset involves becoming knowledge about investing while also listening to professional planners. Ignore hot tips, don’t panic in a crisis, and forget about what other people are doing.

If you do decide to pick stocks, focus on a just a few profitable companies where you have deep knowledge of the business.

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