THE RICH INVEST DIFFERENTLY FROM YOU AND ME — BUT WE CAN COPY THEM

THE RICH INVEST DIFFERENTLY FROM YOU AND ME – BUT WE CAN COPY THEMJONATHAN BURTON | JANUARY 22, 2014

The grand scheme for those who live grandly holds a lesson for us all.

Wealthy investors spread their money widely and, presumably, given the professional advice they pay for, wisely. At least, that’s the finding of the latest asset-allocation survey from TIGER 21, a members-only club of entrepreneurs, executives, money managers and other high-net-worth types.

Their typical investment portfolio at the end of 2013 looked like this: 23% stocks, 21% private equity, 21% real estate, 14% bonds and fixed income, 8% hedge funds, 1% commodities, and 11% cash. While that’s little changed from a year earlier, there’s been a significant shift among the wealthy toward private equity and away from fixed income since mid-2011. Private equity now sits just below its highest point in five years, while fixed-income enthusiasm is at near-record lows.

“Beginning in the second quarter of 2012, members started to shift allocations to private-equity holdings and they have built on and maintained those positions,” says Michael Sonnenfeldt, founder and chairman of TIGER 21, in a prepared statement.

Sonnenfeldt estimates that TIGER 21 members finished 2013 with average portfolio returns in excess of 10% – “almost certainly,” calling it “the best year since prior to 2008, by a long shot.”

Now a 10% gain might seem a failure in a year when the return on the benchmark S&P 500 index SPX -1.28% topped 32%, including dividends. But this TIGER 21 portfolio is a capital-preservation-minded strategy – a 23% commitment to publicly traded stocks is a token presence.

And this reflects what many rich people and their advisers know: Over time, trying to shoot out the stock-market lights is a recipe for shooting yourself in the foot – or worse. With inflation in check, a 10% return from a moderate-risk portfolio is a good haul.

It can’t be said enough: Capital preservation is key for any investor. If you are fortunate to have enjoyed above-average investment returns in the past couple of years, take some profits off the table. The worst thing for an investor is being shaken out of the market at precisely the wrong time, as people who dumped stocks in 2008 and early 2009 have learned the hard way. With a diversified, risk-controlled portfolio, market corrections won’t be as scary, and you’ll have money to buy stocks when others are selling cheaply.

Maybe this strategy won’t bring you the wealth of a TIGER 21 member, but you won’t get eaten, either.

– Jonathan Burton