Why the wealthy avoid high risk

I just came across a rather interesting article on CNN Money. (Interesting for the most part because of where I found it).

In it, Fortune reporter Katie Benner shows how the affluent attain and maintain their wealth not by seeking earth shattering returns but by consistent and gradual growth, continuously managing and assessing risks and diversifying between assets.

“For the most part, our investors are more concerned with wealth preservation and strategic growth, rather than trying to hit a home run.”

“A typical asset allocation [is that] of 15 percent real estate, 15 percent international equities, 10 percent alternative assets, 10 percent in bonds and 50 percent U.S. stocks.”

Although this may seem like an adequate strategy, many of those who have diversified as such have been investing for years. The 50% allocation to stocks would have been highly efficient in the early 90s but of poor judgment in years such as 2000. Thus, today an allocation gearing more towards commodities, gold and international assets and currencies, while shifting out of U.S. equities and Bonds would seem more reasonable.

“Small cap value has been a great performer, and we even have a small portion of our portfolio devoted to Micro caps.”

This is the weapon of the small investor. Large funds are unable to buy into smaller companies and must search for larger opprtunities. The individual however can find bargains in small and micro cap companies greatly increasing his returns. Warren Buffett once said “I could average 50 to 100 percent returns a year, if only i had less than a million dollars.”

“Managers and investors are, for the most part, bullish on equities but they recognize that after several years of positive returns for overseas and domestic stocks, the low-hanging fruit may be gone. ‘We will have to work a little harder to find good buys, but there are a lot of companies out there languishing.”

This is the brilliance of the wealthy. Even during times of prosperity they recognize that such times will not forever continue.

“Clearly there are some very major risks out there – the risk that war in the Middle East will expand and a major oil disruption will shake the global economy; the risk that China or India could implode. These risks are much more significant than a policy mistake that brings interest rates too high,” says Hill. “But we can’t simply live in fear of it all. We just have to be very diversified so that we can win whether the markets go up or down.”

So the wealthy realize that the economy is in trouble, even without the Middle East, and that the world is far too optimistic on China and India. Amazing though that I see no allocation to Oil or Metals in their portfolios. (Maybe they own some mining shares).

As a wise rich man once pointed out “If you wish to become wealthy, just don’t lose money”, and as it would seem the highly affluent follow this rule quite attentively.

Why the wealthy avoid high risk
Katie Benner
February 21, 2007


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