How Being a Boring Investor Can Make You Rich
Most millionaires don’t rely on complicated strategies to attain wealth. More than three-quarters of a typical millionaire’s portfolio is held in a basic mix of stocks, bonds, and cash—with some real estate and annuities mixed in, according to Phoenix Marketing. As for exotic fare such as private equity or art, only 5% to 7% of the average affluent person’s wealth is tied up in those investments. And just one in eight high-net-worth households even owns a hedge fund, according to a survey by U.S. Trust.
That sure sounds a lot like the strategies regular investors use. So why do millionaires do so much better? Well, for one, they actually stick with their plain-vanilla strategy and don’t let market swings or hot performance sway them. And they pay greater attention to the small stuff that can nick returns over time.
That will be particularly important going forward. “Given today’s stock valuations and low interest rates, it would be safer to assume returns that are 1.5 to four percentage points lower than historical averages,” says Hal Ratner, head of research for Morningstar Investment Management. For a balanced 60% stock/40% bond portfolio, you’re looking at returns closer to 5% rather than the historic 8.6%. Here are ways to boost that result:
Your Millionaire Moves
• Embrace your passive side. Nearly a third of those with ultra-high net worth—folks with $5 million or more—are interested in investing in low-cost ETFs this year, Spectrem found. Among those worth less than $1 million, it’s just 14%.
What do the wealthy know? That passively managed index funds and ETFs outpace actively managed funds over the long term, thanks to their lower costs. In the 10 years ending in December 2014, the S&P 500 returned an annualized 7.7%, while the typical actively managed blue-chip fund gained 6.6%. A $100,000 investment will hit $1 million in 37 years at 6.6% rate. But at 7.7%, you’ll get there five years sooner.
The Oracle of Omaha gets this. In his will, Buffett left instructions for the trustee managing his wife’s estate to go with index funds, preferably Vanguard’s. “I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions, or individuals—who employ high-fee managers,” he wrote.