Learn To Invest Like The Richest One Percent

54429733 - salary variation. flat design business concept cartoon illustration.All three of my girls are now on Instagram. If you aren’t familiar with Instagram, it is a popular social media platform for sharing photos of your life and looking at photos that your friends post and even some posted by celebrities. We gave my daughter Phoebe the nickname “Hashtag Phoebe,” because she accompanies all of her Instagram photos with an array of “hashtags.” Hashtags such as #selfie, #family, and #summer; the latest was #fungirl. Let me tell you, if you think communicating with a teenager is hard normally, try talking to one who has embraced the language of hashtags: it is #impossible.
Anyway, as I was driving home a few weeks ago from a softball tournament, I could hear all three of my daughters talking in the back seat about the celebrities that they follow on Instagram, and how those celebrities always seem to have the latest and greatest items and be doing so many fun things. I asked my daughters how they could possibly know so much about these celebrities, and they explained they see them on Instagram. Apparently these celebrities mention the brands they are wearing, they take photos of things like their new line of skin care, and they post “selfies” of themselves out to dinner at their favorite restaurants. I tried to explain to the girls that celebrities usually don’t pay a dime for such things, because the designers they are wearing and the restaurants where they are eating want to be associated with the rich and famous—so they give their products and services away free to them. Those celebrities get all sorts of free stuff.
They were appalled. Maeve said, “They are already rich; they don’t even need the stuff to be free!” Sophie followed up with, “It’s the poor people that need free stuff, like me!” And Phoebe, “Yeah, I can’t afford those jeans! They should give me some!” Those are my girls, always trying to find an angle for themselves.
Well, it turns out the perks of being rich extend into the investment world as well. A recent study performed by the investment research firm, Openfolio, found that the wealthiest 1 percent of American investors had higher returns, or less of a loss, than the rest over the past 12 months. Of course, we all know that wealthier people make more money than those with less money, given the same rate of return. (Five percent of $1 million is a lot more than 5 percent of $100,000.) That’s to be expected, but it has been found that the return is not even the same, not even close really, according to Openfolio.
The analysis performed by Openfolio shows about a 7 percent difference between the two groups of investors over the past year, in favor of the wealthy. Now, the market isn’t simply handing out better returns to the wealthy, hoping they will take a picture of the cash and post it to Instagram. The difference in their returns is due to the investment behavior of the wealthy, a behavior that all investors would be wise to replicate.
So what is it that they are doing differently? The main difference is that ever-important investment strategy: diversification. You see, if a portfolio is focused on very few stocks or sectors, any movement in those few stocks or sectors can lead to dangerous volatility. The rich, however, are much less likely to put their money into single stocks like Apple or General Electric; they tend to be much more diversified in many different stocks in a variety of sectors.
Openfolio broke it down into specifics. The bottom 5 percent of investors have positioned the vast majority (over 70 percent) of their portfolios into single stocks, creating a very volatile portfolio, with volatility within the portfolio of over 33.23 percent. The rich guys, on the other hand, have much less volatility—just 14.9 percent (less than half)—because they have less of their holdings focused on single stocks. Essentially, they are heavily diversified, have less volatility, giving them a higher probability of success. The report further suggests that wealthier investors tend to take on less risk, while other investors are chasing returns resulting in more risk. Of course, some of these riskier bets pay off. However, over time, the data overwhelmingly says that this type of strategy does not work.
Hmmm . . . it doesn’t have to be that way.
Folks, you hear Susan and I say it all the time: a strategy focused on managing volatility and downside risk is the key to long-term investment success.
An annual study of investors conducted by DALBAR, the nation’s leading financial market research firm right here in Boston, found one of the primary reasons why small investors fail is due to their investment process, or lack thereof. The DALBAR study also found that most small investors make investment decisions based on their emotions, perceptions, or instincts about the market. We find that it is this lack of process that often leads individual investors to fall into the all-familiar cycle of buying high, and selling low.
Folks, what’s your process?
Having a diversified portfolio, backed by strategies that use facts and logic to help manage downside risk, take advantage of gains and minimize losses, can be the difference between making money, and losing money, in a market as volatile as we’ve seen since 2000.
While you may not ever get a free pair of jeans handed to you, or a prime table with no reservation at a new restaurant, you can earn similar investment returns as the rich and famous. Take a look at your process, define your goals, and stick to an investment plan that helps to protect you and your financial future.
Be vigilant and stay alert, because you deserve more.
As my Phoebe would say, #Haveagreatweek! My mother does say to me all the time that the apple does not fall far from the tree.