Why You Should Not Invest Like the Uber-Wealthy
I don’t know about you, but I regularly see advertisements and articles promising to help me “unlock the investing secrets of the uber-wealthy.” Then again, my job requires I research investments, so perhaps our internet-overlords serve me more of these ads than the average person. Either way, I’m not a big fan.
Investment ads like these are designed to trigger an emotional response. They include pictures of private jets or yachts. The people highlighted look ridiculously happy (just like retirement ads!). They are worded to trigger curiosity and fear of missing out. The strategies being peddled are various, but pitches I’ve seen recently include hedge funds, real estate investment trusts (REITs), day trading, margin trading, and private equity. The ads try to get you to purchase a presentation that teaches you how to implement or get access to the investment.
I chuckle every time I see these ads, but I’m concerned they are hoodwinking people. They are misleading in a number of ways. The riches of the wealthiest are misunderstood. Admittedly, I’ve only worked with a few billionaires. Most of my clients have been “mere” millionaires that wouldn’t quite qualify as “uber” or “ultra” wealthy. But I’ve been around enough to learn a few things.
- This is not how the uber-wealthy created their money. Complex investment strategies often require a lot of wealth, but that does not mean it was created that way. The large fortunes in our country come from entrepreneurs who created or grew large business ventures. For example, when Credit Suisse did their 2018 global report, they noted the richest only have 25% of their wealth in financial assets. The majority of their wealth was in assets like personal businesses.
- Having lots of money does not mean you’re good at investing. Families making fortunes aren’t more investing-savvy than the rest of us. Research that looks at the largest and most sophisticated portfolios (like endowments such as Yale and Harvard) shows they lag simpler portfolios.
There are good reasons the majority should not invest like the wealthiest. Even for those strategies that can be sound investments, there are several good reasons normal investors should stay away from them:
- Concentration risk: A $250,000 private equity fund minimum may be chump-change to a billionaire looking for ways to take bigger risks. But retirees with a $1 million portfolio to live off of would be depending too much on one high-risk investment.
- Higher fees & expenses: Sophisticated investments take more (and higher-paid) people to manage and track them. These expenses are a serious drag on returns, and often eliminate any advantage the investment had in the first place. They do, however, make the managers very wealthy. They can also mean spending much more for tax return prep.
- Lower liquidity: Most complex investment strategies involve locking money up for years or decades. Locking up $100 million may not be an issue if you have additional funds in the bank. But for the average investor, access is critical.
The uber-wealthy are just as prone to sales pitches as we are. Columnist Carl Richards once wrote about an investment proposal he was asked to give a very wealthy family. He put together a straightforward portfolio involving index funds. The family turned him down, asking if he had anything more. Out of curiosity, he tried an experiment by submitting the exact same strategy but this time dressing it up with more sophisticated language. He hyped it with fancy jargon, obscuring the details of the portfolio. He made it seem secretive by referring to the methodology as a “black-box.” The family then expressed interest . . . until he pointed out what he did.
It turns out the ultra-wealthy respond to the same gimmicks we do.
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