When we see a seemingly wealthy person saunter by, we may assume that he or she is on top of everything. We may feel a twinge of envy, wishing that we could have such a good grasp of our finances. If we do that, though, we may be reading too much into the picture.
The nice people at Northern Trust
- Many of these folks are expecting their portfolios to perform better than they probably will.
- Many of them are not sufficiently diversified across asset classes and don't plan to become sufficiently diversified anytime soon.
Let's tackle the first item first. According to the survey, some 40% of respondents expect their portfolios to offer a greater return (by 2 percentage points or more) than what would be realistic, given their portfolio's assets and general respondent expectations for the stock market. Even worse, about 16% were looking for returns fully 5 percentage points greater than what is reasonable.
(Quick quiz: What has been the stock market's average annual return over most of the past century -- 5%, 10%, 15%, or 20%? I'll offer the answer later.)
Next, let's look at the diversification issue. Here I'll quibble a little bit. I see merit in several points of view on this topic. Conventional wisdom holds that most of us should invest in both stocks and bonds, for example, and shift more toward bonds as we grow older. But we Fools like to point out how stocks have outperformed bonds over the vast majority of long time periods (such as 10-, 20-, and 30-year periods) and that even at age 70, many Americans may still remain invested in stocks for another 10 or 20 years.
Northern Trust reported: "[The] survey revealed that more than half (59%) of millionaire investors surveyed are inadequately diversified across four broad asset classes: equities [a fancy way of saying stocks], fixed income [again, fancy, for bonds], cash, and alternative investments, which includes real estate, hedge funds, and private equity. Among this group, investors with no exposure to alternative investments accounted for 78% of the total."
I'm not sure how critically valuable these alternative investments are, though owning some real estate has worked well for many people for a long time. I suspect that many of those who stayed invested in the likes of Wal-Mart
- Funds' Dirty Little Secrets
- The Hedge Fund Bash
- Buying a House Is Easy!
- Make Money as a Landlord
- Don't Bet on Real Estate
- I'm Buying This One for Me
Here's another interesting finding: "While the majority (69%) of surveyed affluent investors consult with their principal advisor when making decisions about investing . more than a third (34%) of millionaires view themselves rather than a financial professional as their 'principal advisor.'" An expert added: "We're seeing a defection among investors from traditional investment advisors perhaps because of reported improprieties, lower-than-expected returns in the last few years, and skepticism that advisors' interests aren't aligned with clients' interests. It's key to choose a principal advisor who is independent and provides unbiased and objective investment advice."
If you'd like to invest like these bigwigs, we can help. You can avoid the sometimes conflict-laden advice offered by expensive traditional brokerages by using a less expensive brokerage that offers lots of free research. Learn more in our Broker Center. (Did you know that some respectable brokerages offer trading commissions of $5 per trade -- or less?)
You can also tap the expertise of a new breed of financial advisor -- via our TMF Money Advisor service, which offers low-cost, personalized, professional financial advice by phone or Internet. These folks can help you plan your retirement, save for college, make estate-planning arrangements, answer tax questions, and more. And you can try them for free.
(Oh, and here's the answer to that quiz: The stock market has averaged an annual return of roughly 10% over much of the past century. But you knew that, right?)
Longtime Fool contributor Selena Maranjian owns shares of Wal-Mart and PepsiCo. The Motley Fool has a disclosure policy.