Friday, June 24, 2011

Where the rich are keeping their money

The next time your broker or 401(k) adviser tries to talk you into aggressively investing your retirement, consider the results of the latest Merrill Lynch- Gap Gemini survey of high net worth individuals:

The core of the rich portfolio is surprisingly conservative. The wealthy have, on average, 43% of their holdings in low-risk assets. That's 29% bonds and a thumping 14% in cash. So much for the idea that the more you have, the more risk you can take. (It matters, of course, that the rich are typically much older than the rest of us, and are therefore more likely to be risk-averse for that reason.)

They still only have 33% of their money in equities — a slow climb back from the 25% lows seen at the end of 2008. Ominously, while that 33% figure does not seem very high, it nonetheless equals the levels seen just before the crash. And the rich told surveys that they are planning to ramp up their equity holdings pretty substantially this year.

Real estate makes up 15% of the average allocation and gold and other alternative investments are down to 5%. The lesson learned 3 years ago is that real estate can be a risky investment (although housing is probably near a generational low price now at the moment), and for most small investors this has entailed a disproportionately large percentage of savings, even to the point that most of us are leveraged with a mortgage.

Your job is the best place to earn income-- learn a skill that is valued by society-- investments should be primarily for wealth preservation. Three lessons: 1) cash is an allocation, 2) not everyone should necessarily own a house, and 3) everyone is trying to sell you something, even your 401(k) adviser.

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