Chuck Jaffe
As much as everyone likes a good get-rich quick story, the rich typically didn’t make their wealth overnight, which should comfort investors who are concerned that buy-and-hold investing no longer works.
Support comes from the 2016 Insights on Wealth and Worth survey conducted by U.S. Trust. The study explored the common success traits of wealthy Americans across all generations, surveying close to 700 individuals with at least $3 million in investable assets. The results, says Chris Heilmann, chief fiduciary executive at U.S. Trust, show that «the American Dream is alive and well.» (See the survey results.)
«What has shaped generations of wealthy American families are their deeply held values and beliefs, rather than growing up privileged,» Heilmann said. «Their advantage in life comes not from financial privilege or inheritance, but from basic values and discipline shaped by family.»
According to the survey, more than three-quarters of the wealthy investors surveyed came from middle-class or lower backgrounds, and earned their wealth mostly through income from work and investing.
They took one of three basic paths to wealth: earning it; investing to get it, or becoming an entrepreneur. Only 10% attributed their wealth mostly to an inheritance. In short, the wealthy have worked their way to their enviable portfolios, and took a long time getting there.
Of the large group of wealthy who invested their way to wealth, there was nothing sexy and fast about how they put their money to work. «Long-term buy-and-hold» strategies for traditional stocks and bonds were the path taken by around seven of every eight of the high net-worth investors surveyed. More than 80% said they claimed their fortune through a series of small wins, as opposed to taking big investment risks; the same percentage said that investing to reach long-term goals is more important than funding current wants and needs.
There’s no shortage of critics who say buy-and-hold investing doesn’t work. They will point to losses endured during the financial crisis of 2008-09 or the bursting of the internet bubble in 2000, and they will cite empirical evidence of people who mis-timed their moves and lost fortunes.
But people who have and were building fortunes largely stayed put through these troubling market events, and mostly seem poised to do that again. Almost 60% of the wealthy investors surveyed reported keeping more than 10% of their investable assets in cash, and one in five claimed a cash position of 25% or more.
«There are definitely a lot of people who see having that cash as protection against volatility, as a safe haven that will help them get through whatever happens,» said Heilmann, «but the top reason for having all that cash was to be opportunistic, whether that means buying on the dips or jumping on a trend.»
Of course, wealthy investors can afford to hold more cash, accepting a zero return in exchange for having ready money. But taking a more conservative approach and diversifying with the occasional opportunistic tilt works better than flitting in and out of the market, or trying for the next quick score — even if it’s much less exciting.
The wealthy invest, apparently, as if they will be right in the long-term but could be wrong in the short-term. So they spread money out across traditional asset classes and stay with their plan.
Perhaps most interesting is the fact that the wealthy investors surveyed weren’t consumed by «alternative investment strategies,» the newfangled approaches that are designed to keep portfolios moving forward in all conditions, but which often achieve far less.
Rather than looking after their portfolios around the clock and over-diversifying into asset classes they don’t fully understand, getting wealthy slowly is about disciplined planning, regular rebalancing, making sure the portfolio is age-appropriate, and other boring, dull tactics.
Today’s wealthy made their fortunes before most of the alternative asset categories were available in mutual funds, and while younger, less-affluent investors may like the sales pitch, long-term success is about what works over those many years, not what’s hot at the moment.
Heilmann noted that investors «don’t have to make things more complicated because the ability to buy good companies — good, dividend-paying companies — and to hold them on a long-term basis is still alive and well.
«There’s a lot to be said for stable and steady,» he added. «That’s part of the American Dream too, even if it’s not what people talk about the most.»