Why is it that you never hear about millionaires playing the lottery or slot machines in Vegas? Often the middle class and the poor pour their hard-earned money into games of chance. Why?
Speculation, accessibility, and affordability. The poor and middle-class gamble and buy lottery tickets because they like the thrill of a potentially big payoff (speculation); it’s easy to get lottery tickets or drive to a casino (accessibility), and it doesn’t cost a lot of money to play (affordability).
The reasons why the poor and middle class gravitate towards gambling and the lottery are the same reasons they gravitate towards stocks: speculation, accessibility, and affordability.
Mainstream investors like the thrill of a big payoff when playing the stock market. Everyone’s looking for the next Amazon. Anybody can invest in the stock market. It’s as easy as downloading the Robinhood app, transferring funds from a bank account, and trading within a day or two.
This accessibility is why the stocks skyrocketed during COVID stimulus checks when millions of newbie investors downloaded Robinhood to trade fee-free. This tells us why stocks are popular with the poor and middle class. It doesn’t take much money to play the stock market like a lottery ticket or playing slots. Shares can be bought for as little as a few pennies.
The preference of the middle class for stocks is evident in the following graph:
– Source: American Association of Individual Investors Asset Allocation Survey
Ultra-high-net-worth investors (UHNWIs) are ultra-wealthy because they play a different game. They invest differently because they have different goals. When the middle-class zigs, UHNWIs zag. So, while the middle class gravitates toward assets that are speculative, accessible, and affordable, UHNWIs gravitate toward assets that are not speculative, accessible, or affordable.
UHNWIs don’t like to gamble on speculative assets or assets touted as the next big thing. They prefer tried and true investments that have stood the test of time and that can be relied on to generate consistent returns in the future.
They also do not gravitate toward assets that are accessible. That’s because to UHNWIs:
Accessibility = Liquidity = Volatility
UHNWIs avoid assets that anyone has access to. Liquid assets like stocks promote herd behavior which in turn creates volatility and unpredictability. Accessibility, along with affordability that makes the stock market a playground for the masses and enables the madness of the crowds, is what UHNWIs avoid.
That’s why the asset allocation of UHNWIs is vastly different from that of the mainstream investor, as evidenced by the following chart:
The preceding chart is the latest asset allocation report of a renowned group of UHNWIs – TIGER 21. TIGER 21 is a peer-to-peer investment network consisting of UHNWIs across Europe and North America – with each individual required to show $50M in investable assets to join. Each quarter, they publish an asset allocation report showing where their members place their money. According to the latest report, these UHNWIs allocate more than half of their portfolios to assets, not on the radar of the middle class – commercial real estate (CRE) and investments in private companies (i.e., private equity or “PE”).
UHNWIs have long relied on CRE and PE to generate reliable and consistent returns to stabilize their portfolios.
For example, CRE has outperformed the S&P 500 over 25 years at reduced risk. Moreover, the right PE investments in the right companies and industries can generate similar returns and, like CRE, can also hedge against inflation by generating consistent income and appreciation that keep pace with rising prices.
UHNWIs are ultra-wealthy because they don’t do what’s easy, accessible, or what everyone else is doing.
They’re willing to consider alternatives to traditional assets that generate above-market returns. And the one thing that sets them apart from the middle class is patience.
They’re willing to invest long-term if that means they can grow and preserve wealth that is insulated from the masses. So, while the middle class is quick to spend their earnings on speculative investments or assets that don’t last, UHNWIs are willing to be patient and save so they can invest in productive assets that can build wealth without the risk that goes along with speculating.
How about you? Where do you fall on the investing spectrum? What do you gravitate towards?
If you gravitate towards assets that are speculative, accessible, and cheap, maybe it’s time to reevaluate your allocations and consider the allocations of UHNWIs who invest differently.
