Many individuals are curious about where millionaires keep their wealth, and for good reason. By gaining insight into the financial habits of the wealthy, we can learn from their success and potentially improve our own financial situation. The data shows that millionaire households allocate approximately 25% of their wealth to their primary residence and 15% to business interests, with the remaining 60% invested in stocks, bonds, and cash. However, as households become even wealthier, the proportion invested in stocks, bonds, and cash tends to decrease, with business interests becoming the dominant source of wealth.
Topics of the week
Where Do Millionaires Keep Their Money?
Nick Maggiulli, Chief Operating Officer for Ritholtz Wealth Management LLC., published a great post.
If you’ve ever wondered, “Where do millionaires keep their money?” then you’re not alone. Many people are curious about the financial habits of the wealthy, and for good reason. Having a better understanding of how millionaires manage their money can help us learn from their successes and potentially improve our own financial well-being as well. We’ve touched on this before in one of the previous Dispatches. In his blog post, Nick dives deeper and explores the various options available to millionaires for storing and growing their wealth. From traditional asset classes to more exotic investments, we’ll take a closer look at the strategies millionaires employ to protect and grow their fortunes. Whether you’re a millionaire looking for new ways to manage your money or just someone who wants to learn from the best, this post has something for you. Here we go.
How Do Millionaires Invest Their Money?
To figure out how millionaires invest their money, I will be examining the three primary investment decisions that impact their returns (according to the late pioneer of institutional asset management David Swensen):
- Asset allocation: What asset classes do millionaires invest in.
- Market timing: When do millionaires buy/sell those assets.
- Security selection: How do millionaires choose which securities to buy within an asset class.
To do this, I will primarily be relying on Vanguard’s 2020 How America Invests study, which examines how affluent households (those with at least $500,000 in investable assets at Vanguard) invest their money. While not all of the households in this study are millionaires, the vast majority of them are. The median household in the study has over $1 million with Vanguard and those below the median have assets outside of Vanguard (i.e. real estate, non-Vanguard accounts, etc.) that make most of them millionaires as well.
With that being said, let’s address the first part of how millionaires invest—their asset allocation.
What Asset Classes Do Millionaires Own?
According to Vanguard, the asset allocation of a typical millionaire household is:
- 65% Stocks (Equity)
- 25% Bonds (Fixed income)
- 10% Cash
As you can see in the chart below, this allocation has been relatively stable over time as well:
This gives us a good idea of how millionaires tend to invest their money within their investment accounts on average. However, it doesn’t tell us anything about how those allocations change over time within households. Since the chart above is the aggregate allocation across all households, we don’t get to see any age-related allocation changes.
Fortunately, Vanguard provides a breakdown of allocation by household age in their study as well. We can see this in the table below which shows that households under 45 tend to allocate around 75% of their portfolios to equities, while households older than 65 allocate around 60% to equities:
What happens to the money that comes out of equities as these affluent households age? It goes into fixed income.
From the table above, we can see that the fixed income allocation of affluent households nearly doubles from age 50 to age 80. In other words, affluent households tend to go from 15% bonds to 30% bonds as they enter retirement.
But, what about other asset classes? Don’t millionaires invest a lot of money outside of stocks, bonds, and cash? According to the 2017 U.S. Trust Insights on Wealth and Worth, the answer is “Not really.”
As their study shows, high net worth households (those with over $3 million in investable assets) had the vast majority of their wealth in stocks, bonds, and cash, with less than 7% of their investable assets in alternatives:
This suggests that what we see in the Vanguard’s How America Invests study is representative of how the typical millionaire household allocates their money. They own typical asset classes and not all these exotic investments like the financial media might have us believe.
Of course, these studies exclude personal real estate and ownership of an individual business, both which can be significant. As Thomas J. Stanley and William D. Danko stated about the typical millionaire household in The Millionaire Next Door:
On average, 21 percent of our household’s wealth is in our private business.
Once we include ownership of private businesses and real estate, the typical millionaire household’s allocation to traditional asset classes like stocks and bonds is a bit lower that what has been advertised above.
We can see this more clearly if we look at the chart below (from VisualCapitalist), which highlights how household net worth is broken out across different wealth tiers. In it we can see the percentage allocated to a primary residence, vehicles, business interests, and much more:
As you can see, millionaire households have about 25% of their wealth in their primary residence and 15% in business interests (trust me I measured the bars). This implies that the typical millionaire has a 60% allocation to stocks, bonds, and cash. More importantly, this percentage seems to decline as households get wealthier. Once you become a decamillionaire or centimillionaire, business interests began to dominate most of your wealth.
Now that we have a rough idea of how millionaires allocate their assets, let’s look at their buy and sell decisions.
Do Millionaires Try to Time the Market?
When it comes to trying to time the market, affluent households are quite tame. As the table below (from Vanguard) illustrates, a little over half of all affluent households traded their accounts within a year, and when they did they only traded about 10% of their total assets:
This suggests that millionaire households aren’t trying to time the market. And this isn’t just an artifact of the relatively calm market stretch from 2015-2019. During the market crash of March 2020, only 11% of Vanguard investors made any active trades.
And this isn’t just a Vanguard thing either. The Millionaire Next Door comes to a similar conclusion when describing the typical millionaire household (emphasis mine):
We hold nearly 20 percent of our household’s wealth in transaction securities such as publicly traded stocks and mutual funds. But we rarely sell our equity investments.
From what I’ve seen between these two data sources, it seems clear to me that most millionaires aren’t trying to time the market in any meaningful way. They invest and let it ride.
Now that we have looked at market timing, let’s examine how millionaires pick which securities to buy within an asset class.
How Do Millionaires Pick Securities Within an Asset Class?
When it comes to how millionaires pick securities within an asset class, the answer is—diversification. If you look at the investment product choices that affluent households make, you will see that the vast majority use mutual funds (which tend to be diversified), with only one third of them owning any individual securities (i.e. individual stocks):
While the vast majority of affluent households diversify through mutual funds, they are not all passive investors. Though the shift to passive funds accelerated from 2015 to 2019, 77% of affluent households still owned an active mutual fund in 2019.
This might surprise you, but this phenomenon is mostly being driven by older households who tend to have more of their wealth in active strategies:
As German scientist Max Planck once said:
Science advances one funeral at a time.
Well, the same seems to be true with passive investing. Older investors, who didn’t grow up in the age of mass indexing, don’t seem to have taken to passive in the same way as younger investors as a whole. Therefore, as these older investors pass on, we should see even further adoption of passive investing in the future.
Now that we have looked at the asset allocation, market timing, and security selection decisions of millionaire households, let’s examine whether wealthier millionaires invest the same as their less fortunate counterparts.
Do Wealthier Millionaires Invest Differently?
So far I have focused our analysis on households that are right above the millionaire threshold. But, what about households that have more than just a few million dollars to their name? Do they invest differently than the typical millionaire household?
The evidence suggests that they do. This report from KKR demonstrates that ultra-high net worth investors (those with >$30 million in assets) invest more money into alternatives (i.e. private equity, hedge funds, etc.) and cash than high net worth investors (those with >$1 million in assets).
As you can see in the chart below, ultra-high net worth (UHNW) investors allocated 30% to stocks, 10% to bonds, 50% to alternatives, and 10% to cash while high net worth (HNW) investors allocated around 50% to stocks, 20% to bonds, 25% to alternatives, and 5% to cash:
I can’t necessarily explain why UHNW investors have more money in alternatives, but I have a few theories. One of them is that, as wealth increases, households tend to invest based more on status than returns. Alternative investments like private equity and hedge funds offer a sense of exclusivity that you can’t get with a Vanguard index fund.
Another possibility is that wealthier households invest in alternatives because they are the only ones that can access them anyway. While anyone with a few thousand dollars (sometimes less) can buy an index fund, you need to have serious capital to get into many of these alternatives.
Fortunately, retail investors (i.e. you and I) don’t need alternatives to successfully build wealth. In fact, there’s a decent amount of evidence showing that public investment strategies tend to outperform private strategies, especially after fees are taken into account. For example, the chart below shows the returns generated by hedge funds and the S&P 500 from 2015 to 2021:
As you can see, the S&P 500 outperformed a basket of hedge funds in every year from 2015-2021. This is even true in 2018, the only down year during this time period! For all those hedge fund defenders that like to say, “But hedge funds will outperform in a down market!” please explain 2018.
Either way, my point stands. There is no evidence that the typical retail investor needs alternatives to build wealth. While investing in alternatives can be nice to brag about at dinner parties, I’m not in the business of bragging. I’m in the business of trying to make you richer.
With that being said, let’s conclude by discussing why investing like a millionaire won’t necessarily make you into one.
Why Investing Like a Millionaire Won’t Necessarily Make You a Millionaire
Throughout this article we have assumed that by emulating how millionaires invest their money, you too will one day become a millionaire. But this isn’t necessarily the case. Why? Because most millionaires don’t become millionaires solely based on their investment decisions. They also tend to have a high income, a high savings rate, or both. And the further you go up the wealth spectrum, the more apparent this becomes.
If you want to become a typical millionaire, like the affluent households in Vanguard’s 2020 How America Invests study, buying a diverse set of income-producing assets and earning 7% a year will work just fine.
However, if you want wealth that is orders of magnitude higher, the S&P 500 ain’t gonna cut it. To obtain extreme levels of wealth you need:
- A very high income (i.e. famous musician/actor/athlete, successful business owner, C-Suite executive, etc.), or
- A huge liquidity event (i.e. sell your business, startup equity IPO, etc.)
Possibly a bit of both. Of course, I don’t know which path will be right for you. But, I do know that investing like a millionaire won’t necessarily make you into one.
Links to consider
- PE in Crosshairs in $11 Trillion Investor Group’s CO2 Plan
- The Getty Family’s Trust Issues
- Music Lovers to Become Royalty Investors in New Trading Platform
- Multi-Manager/Pod/Hedge Fund 101
- Q&A: The draw of private markets for family offices
- Raising Capital Has Gotten a Lot Harder — But These LPs Could Be the Solution
- We Asked ChatGPT to Make a Market-Beating ETF. Here’s What Happened
- Cultures Clash at Salomon Smith Barney
Infographics
Quotes
Books that caught our attention this week
The Connections World: The Future of Asian Capitalism
by Simon Commander and Saul Estrin
A central feature of modern Asia that trumps differences in economic and political systems is the web of close relationships running between and within business and politics; the connections world. These networks facilitate highly transactional interactions yielding significant reciprocal benefits. Although the connections world has not as yet seriously impeded Asia’s economic renaissance, it comes with significant costs and fallibilities. These include the creation and entrenchment of huge market power and the attenuation of competition. They in turn hold back the growth in productivity and innovation that will be essential for further development. The connections world also breeds massive inequalities that may culminate in political instability. The authors argue that if Asia’s claim to the 21st century is not to be derailed, major changes must be made to policy and behaviour so as to cut away the foundations of the connections world and promote more sustainable economic and political systems.
All-in On AI: How Smart Companies Win Big with Artificial Intelligence
by Tom Davenport and Nitin Mitta
Written by bestselling author Tom Davenport and Deloitte’s Nitin Mittal, All-In on AI looks at artificial intelligence at its cutting edge from the viewpoint of established companies like Anthem, Ping An, Airbus, and Capital One. Filled with insights, strategies, and best practices, All-In on AI also provides leaders and their teams with the information they need to help their own companies take AI to the next level. If you’re curious about the next phase in the implementation of artificial intelligence within companies, or if you’re looking to adopt this powerful technology in a more robust way yourself, All-In on AI will give you a rare inside look at what the leading adopters are doing, while providing you with the tools to put AI at the core of everything you do.
China’s Rise in the Age of Globalization: Myth or Reality?
by Jianyong Yue
This book deconstructs a series of myths surrounding China’s economic rise. The first myth is that globalization led directly to China’s rise; the second is that China is another East Asian developmental state; the third that China’s market reform had been implemented in an incremental way; and fourth that China’s ‘resilient authoritarianism’ has been effective in ensuring the country’s economic and political transformation. Yue argues that the China model is one of ‘crony comprador capitalism’ that has hindered the country’s attempts at economic and political modernity. It is argued that the United States’ strategy of integrating China into the international system is self-defeating in the long run; not because such an approach has created a ‘restless empire’ capable of challenging US primacy, but because the Chinese ‘miracle’ has subsequently backfired on the liberal order created after World War Two. Covering the entire reform period from the end of the Cultural Revolution in 1976 to the present day, the author calls for readers to rethink globalization and leave more policy space for China and the developing nations to pursue national development through internal integration, which is more conducive to democratic transition and global peace.
Dinner with the President: Food, Politics, and a History of Breaking Bread at the White House
by Alex Prud’homme
Some of the most significant moments in American history have occurred over meals, as U.S. presidents broke bread with friends or foe: Thomas Jefferson’s nationbuilding receptions in the new capital, Washington, D.C.; Ulysses S. Grant’s state dinner for the king of Hawaii; Teddy Roosevelt’s groundbreaking supper with Booker T. Washington; Richard Nixon’s practiced use of chopsticks to pry open China; Jimmy Carter’s cakes and pies that fueled a détente between Israel and Egypt at Camp David. Here Alex Prud’homme invites readers into the White House kitchen to reveal the sometimes curious tastes of twenty-six of America’s most influential presidents, how their meals were prepared and by whom, and the ways their choices affected food policy around the world. And the White House menu grew over time— from simple eggs and black coffee for Abraham Lincoln during the Civil War and celebratory turtle soup after and squirrel stew for Dwight Eisenhower, to jelly beans and enchiladas for Ronald Reagan and arugula for Barack Obama. What our leaders say about food touches on everything from our nation’s shifting diet and local politics to global trade, science, religion, war, class, gender, race, and so much more.
Video of the week
Vitalik on Starting New Countries and Improving Yourself | The Network State Podcast with Balaji #1
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Marc Andreessen – AI, Crypto, Elon, Regrets, Vulnerabilities, & Managerial Revolution
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Intro to American Dynamism
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AI is Creating Massive Entrepreneurial Opportunity W/ Emad Mostaque | EP #16 Moonshots and Mindsets
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Japan’s EUV Failure
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Why China is losing the microchip war
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The World In 2030
