The vast majority of investors hold bonds, shares of publicly traded companies, and various combinations of the two, such as mutual funds. They stick to the limited types of investments that qualify for their RRSPs and TFSAs. They may not even be aware that other possibilities exist. Some may wonder if there’s a better way, but assume they don’t have the resources to take advantage of other options. Billionaire investor and businessman Michael Lee-Chin raises an important question: How many people have become ultra-wealthy investing that way? The answer: just about none.
The truth is that the wealthy invest differently than that vast majority. The world’s wealthiest families, along with pension plans such as the Canada Pension Plan and the Ontario Teachers’ Pension Fund, and endowments like the Harvard Endowment Fund, manage and grow billions of dollars. They look to alternative investments, including private equity, hedge funds and real estate, to make, preserve and grow their money. In short, they make money largely through business, not the public stock market.
That’s not to say that these mega-investors don’t hold bonds and shares of public companies; they do, but their managers also understand that the superior diversity brought by owning additional types of investments lowers the volatility and market risk of a portfolio. The low liquidity of many alternative investments and their low correlation to the public equity market are the keys to that reduced volatility. The value of alternative investments does not rise and fall with every shift in the market. In addition, the best investors recognize that times of volatility and crisis are often good times to invest.
Investors with more modest wealth have the same goals as the very wealthy: to make, preserve and grow their money. But they may not know there is a way they can invest as the wealthy do. The techniques used by ultra-high-net-worth families and institutional investors can be made available to other investors if they work with a qualified Portfolio Manager. Portfolio Managers – who are highly trained and experienced – are considered Accredited Investors, which means they have access to private and alternative investments that less-wealthy investors can’t take advantage of on their own. Portfolio Managers make it possible for moderately wealthy people to create portfolios similar to those of investors who have billions at their disposal.
According to The Globe and Mail, other approaches the wealthy use include always setting clear goals. If you work with a Portfolio Manager, the first thing they will do is talk with you about your goals, and then devise a plan to get there. The uber-wealthy also know when to delegate tasks to experts – including managing their investments. Carefully assessing risk, keeping emotion out of the picture and taking the long view are also critical. Having a Portfolio Manager handle your investments can achieve that too.
The wealthy do invest differently, but their strategies are available to many more typical investors. If you want to become highly wealthy, invest as if you already are.