6 Lessons That You Can Learn from ‘Affluent Investors'

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You know how the old saying goes: “Just because Jimmy jumped off a cliff …” I’ve always told my kids to follow their gut and do what’s right, regardless of what their friends and peers are doing.

That’s not always on point, however. There are a lot of folks out there doing stuff we could all take to heart. Recently, I read a paper titled “How America Invests” from the investment management giant Vanguard.* The paper looked at “affluent” investor households -- those with $500,000 of Vanguard-held investments outside any sort of company retirement plan. So it would seem this group of roughly 800,000 investors has been doing something right.

After I delved into the details, it was clear to me that these affluent investors made choices and took actions we could all learn from. Read on for six takeaways that might be helpful to you, too.

  1. Affluent investors held roughly 20% of their stocks in companies outside the United States. It can be easy to stick with what we know; your portfolio may reveal a “home-country bias.” Unfortunately, ignoring the rest of the world can result in a lack of diversification and missed opportunities for potentially bigger returns.
  2. At every age, these investors were using stocks as a long-term approach. Even those in the 55-64 age group retained a robust portfolio of stocks -- 65% -- in their portfolios. Clearly, these folks consider stocks as a key component of their portfolios. Yes, stocks are a long-term choice and not right for every situation or goal, but historically they have outpaced inflation. That, alone, could make them an evergreen holding in yours.
  3. They aren’t making big bets on single companies. With all the headlines regarding huge returns of one security or another, it can be tempting to make a bet on a single company. The data from these investors indicates they haven’t succumbed to this particular temptation. The average allocation to a single individual security was around 5%. While these investors may not see their portfolios quadruple in the very short term, they seem to be positioned for the long haul and are avoiding the specific risk associated with putting all their eggs in one company’s basket.
  4. They are mindful of the taxman. In these investors’ portfolios, the allocation to fixed-income or bond investments within traditional IRAs was nearly twice that of allocation to those same income-producing investments in Roth IRAs. Clearly, this group is cognizant that location of your investments matters. The potential to grow an account tax free may have tilted their choice of assets in Roth accounts.
  5. They aren’t day-trading. In recent months, we all have read a lot about the uptick of day traders. While that approach might work for some (and certainly won’t for others), this group of investors is taking a more staid and proven approach. Over the five-year period surveyed, roughly 70% of these investors traded fewer than six days a year.
  6. These investors are not swayed by headlines. If ever there were a testing time for investors, it was early last year. The onset of the global pandemic, turbulent markets and general uncertainty combined to make things, well, difficult. Not surprisingly, the investors in this survey didn’t let the noise deter them. In fact, the stocks in their portfolios remained stable from December 2019 to June 2020. It doesn’t appear that headlines of the day were translating to potential investment missteps. Emotions in check? Check. Furthermore, the average equity allocation remained nearly constant.

No, I’m not saying to go jump off a cliff. However, it appears that there are some valuable lessons to be learned from how this group of households is handling their finances.

*How America Invests, December 2020, https://advisors.vanguard.com/iwe/pdf/FASHAIFR.pdf

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