How To Invest Like The Wealthy

One of the most transformative benefits financial advisors can provide to clients is to encourage a prudent allocation of investment portfolio to equities. Outstanding returns are available without taking excessive risk, given sufficient time. The compound return of 7%, which is the recent return of equity markets, over twenty years transforms $1,000 to $4,050. This is far superior to a 2% or even 4% return over twenty years of $1,492 or $2,225 respectively.

 The power of compounding coupled with the higher return from equities is a compelling investment argument. However, most households do not own equities, with one exception: the wealthy. The percent of households owning equities tends to increase as wealth increases. A majority, 60%, of households with wealth greater than $500,000 own equity.

Financial circumstances are key to determining risk tolerance. Wealthy households have the necessary financial buffers to withstand the downturns in the market, without impacting their lifestyle. Less wealthy households may also have times when their financial circumstances would allow them to participate in higher returning investments. A thorough analysis of each household’s risk profile can identify the prudent levels of participation in higher return investments. Regular reviews provide the confidence that the participation levels remain prudent for investor’s current financial circumstances.