investing

Investing strategies from the 1 percent

Highlights
  • New strategies for the 99 percent have exploded in the marketplace.
  • The rich understand two concepts better than anyone: risk and diversification.
  • Three factors detract from nominal return: taxes, fees and inflation.

It's not your imagination: The rich have been getting a lot richer. The Congressional Budget Office reports that real income for the top-earning 1 percent of the population soared 275 percent between 1979 and 2007, compared with a 40 percent increase for the middle 60 percent.

There are various reasons for the widening wealth gap. One of them is that individuals with $1 million or more in investable assets, or an annual income exceeding $200,000, are considered accredited investors. This status has given them access to special investments such as hedge funds and private equity funds, which most investors don't have.

But while you may not be able to amass the personal wealth of someone such as Warren Buffett or Mark Zuckerberg, the average investor can grow and preserve wealth by taking advantage of any number of investing strategies that mimic those previously available only to the super-rich.

From mutual funds that replicate hedge-fund strategies to exchange-traded funds that invest in commodities, new strategies for the 99 percent have exploded in the marketplace, says Brent Fykes, senior investment partner at GenSpring, a multifamily office for individuals with at least $20 million to invest. "It's so much different than it was five years ago," he says. "And 10 years ago, it's like night and day."

The rich invest differently

But it's not just about adding a variety of investing strategies to your portfolio. There are two key concepts the 1 percent understand better than the 99 percent, according to Fykes: risk and diversification. Most average investors take on too much risk. "They tend to want to dabble in the stock market and buy the latest hot stock like Facebook or Apple," says Fykes. That strategy is dangerous because it leads to "all sorts of concentration risks," he adds.

The 1 percent, however, "by nature are less risky because they've created a nest egg and don't need it to grow at incredible rates," Fykes says. "They just want to stay rich. On the whole, the 99 percent is in the get rich mode."

For the 99 percent, understanding how to manage risk through diversification is key, agrees Katie Nixon, chief investment officer for personal financial services at Northern Trust. "What we typically see in the 99 percent is a relatively undiversified portfolio with a hodgepodge of funds and investments but lacking in overall strategy."

She recommends average investors match their portfolio with their financial plan instead of assessing investments on a one-off basis. Broader exposure to different asset classes for the 99 percent is a positive development, she adds, "but the key is figuring out what every strategy does to your portfolio and if it gets you to your goals."

Step 1: Inventory your assets

"The very first thing I would tell the 99 percent to do is to take an inventory of assets, and see what you have," says Nixon. "Build a balance sheet." She then suggests re-examining your goals.

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