Warren Buffett might be the world's most famous investor, and he frequently touts the
benefits of investing in low-cost index funds.
In fact, he's instructed the trustee of his estate to invest in index funds.
"My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term
government bonds and 90% in a very low-cost S&P 500 index fund," he noted in Berkshire
Hathaway's 2013 annual letter to shareholders.
Yet, despite Buffett's advice, the wealthy typically don't invest in the simple, low
fee, market-matching index funds.
Instead they invest in individual businesses, plus art, real estate, hedge funds, and other
types of investments with high entrance costs.
These risky investments generally require large buy-in costs and carry high fees, while
promising the opportunity for outsized rewards.
How the Wealthy Invest Steve Ballmer, former CEO of Microsoft, reports
a net worth in the range of $32 billion.
After leaving Microsoft, Ballmer bought the LA Clippers for a record $2 billion.
Despite leaving Microsoft, he owns 330 million shares of company stock, a 4% share of the
firm as of 2014.
At today's $69.94 price tag, that's a whopping $23.08 billion investment.
But Microsoft's largest shareholder has other investments as well.
Ballmer owns approximately $450 million in Twitter shares, plus real estate investments
in Hunts Point, Washington and Whidbey Island.
That means his wealth is concentrated in a few investments — a far cry from the "invest
in low fee index funds" touted by Buffett and most personal finance experts.
Thomas J. Stanley, author of The Millionaire Next Door, notes that most millionaires are
business owners.
So, it's no surprise that these entrepreneurs favor investing in businesses, their own and
others.
The wealthy also have the cash to buy what they love and watch it appreciate.
From rare art to real estate to collectibles, the wealthy enjoy their investments while
they grow in value.
Hedge funds are likewise popular with the wealthy.
These funds of the rich require investors to demonstrate $1,000,000 or more in net worth,
and use sophisticated strategies intended to beat the market.
But hedge funds charge approximately 2% of fees and 20% of profits.
Investors need to get huge returns to support those high fees!
The wealthy also own traditional stocks, bond, and fund investments.
Yet, their riches and interests open doors to other types of exciting and exclusive investments
that aren't typically available to the average person.
Why Don't the Wealthy Invest in Low-Fee Index Funds?
Over the past 90 years, the S&P 500 averaged a 9.53% annualized return.
You'd think the rich would be satisfied with that type of return on their investments.
For example, $10,038.47 invested in the S&P 500 in 1955 is worth $3,286,458.70 at the
end of 2016.
Investing in the whole market with index funds offers consistent returns, while minimizing
the risks associated with individual stocks and other investments.
But the wealthy can afford to take some risks in the service of multiplying their millions
(or billions).
To take one example, look at world-famous investor and speculator George Soros, who
once made $1.5 billion in one month by betting that the British pound and several other European
currencies were overvalued against the German Deutsche mark.
Hedge funds promise extraordinary gains, although in recent years have failed to outperform
the stock market indices.
But they can also pay off in a big way for their rich clients.
Last year, James Simons of Renaissance Technology earned his investors 21.5% net of fees.
And Simons himself earned a handsome $1.5 billion.
The wealthy are willing to risk hefty buy-in fees of $100,000 to $25 million for the opportunity
to reap great returns.
The one-percent's investing habits also tend to reflect their interests.
As most wealthy people earned their millions (or billions) from business, they see this
path as a way to continue maximizing their finances.
They also enjoy art, cars, homes and collectibles; buying those luxuries enhances their lifestyles,
and the future appreciation is a nice bonus.
The wealthy are different than you and me, with massive incomes, net worths, and opportunities.
Although they seek out unique investments in the hopes of spectacular returns, not all
their ventures pay off with returns greater than a low-fee index fund.
A simple investment strategy in low-fee index funds is good enough for Warren Buffett, and
it's good enough for the average investor.
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