Do the wealthy approach investing like everyone else?
Previously, we compared the investing habits of men and women. So in keeping with the theme of examining how different groups manage their portfolios, we now want to look at the investment choices of people depending on their income levels. In other words, do we all tend to invest in the same sorts of products?
The first thing we found is that wealthier investors seem to be more aggressive in their money management. The following table, from a 2015 Gallup survey, shows the investing attitudes of Americans by how much money they make. (And we’re going to assume investing habits are similar in Americans and Canadians, but there could be discrepancies.)
A few things stand out here. First, investors with incomes of $75,000 or higher are far more likely to pick the stock market to be the best long-term investment, compared to lower income groups. (We assume—and it’s a safe assumption—that individuals’ attitudes about various asset classes reflect their actual investment strategies.) Indeed, 38% of Americans in the highest income bracket favour stocks, whereas this number falls to 14% for those investors who make less than $30,000.
What explains this rich-poor decision gap? One answer is that lower income investors simply cannot afford to risk as much as wealthier individuals. A loss of principal to someone making $100,000 may be an annoyance, whereas a loss of principal for someone making $25,000 could mean a substantial hit to their quality of life. As such, investors in the over-$75,000 category can afford to take more risks. They can weather the ups and downs of the stock market in search of higher, long-term returns.
Not surprisingly, then, individuals in the middle and lower income brackets of the survey are far more disposed to savings accounts. Preferring savings accounts over equities is a risk-averse way to approach investing. The returns are not great but your capital is very safe compared to the volatile stock market. Savings accounts are the favoured choice of 24% of investors with less than $30,000 in income and 12% of those in the middle income group. By contrast, only 9% of the over-$75,000 bracket chose these products as the best long-term investment.
Different strokes for different folks
One problem with the Gallup poll is that it only asks investors about products that everyone can access. With even a bit of money, most individuals can purchase a bond, a stock, gold, or just open a bank account. The trouble is that, in reality, wealthy investors have a wider variety of potential investment products available to them.
For example, when Tiger 21, a network of ultra-high net worth individuals, surveyed its members, it found that 41% of their assets were in private equity. Private equity refers to businesses not traded on the stock market. Hedge funds, essentially investment vehicles for sophisticated individuals and institutions, were the favoured choice of 17% of Tiger 21 members. In the case of both hedge funds and private equity, to even have a chance at getting into these kinds of investments, you must have a substantial amount of money—usually $1 million in the case of hedge funds. As you can see, the playing field is not exactly level; everyone can buy stocks, but not everyone can invest in private equity or hedge funds.
At this stage, it’s easy to be pessimistic if you’re not in the highest income bracket. Fortunately, there is some good news.
First, once fees are accounted for, hedge funds don’t actually tend to outperform the stock market. Low cost index funds may not be very exclusive, but that doesn’t mean you’re a second-class investor, (return-wise).
Moreover, the world of investing has actually become far more democratic in recent decades. It used to be that to buy stocks, you needed to have a stockbroker who charged substantial commissions. In addition, research before the advent of the internet wasn’t widely or freely available, so that was yet another impediment for the non-wealthy. Nowadays, online discount brokers mean that buying stocks and index funds doesn’t cost very much. And the internet has made educating oneself about investing easier than ever. It’s also made finding the best GIC rates and savings account rates so much simpler than in days gone by.
Therefore, even if you’re not a multi-millionaire, don’t sweat it. You may not be able to gain entrance to the most exclusive investing clubs (yet), but it turns out that those clubs, in many cases, aren’t really worth the price of admission anyway. What you need is just a click away.