By Donna Fuscaldo
In 2014, the wealthiest 1 percent of investors outperformed everyone else by nearly 40 percent, according to a study by SigFig, an investment management firm in San Francisco. It’s only human to wonder why. Is there a secret performance-enhancing sauce to their investing strategy?
Not necessarily. In fact, Warren Buffett — the ultimate 1-percenter, if you will — is a known proponent of investing in index funds, believing that over the long term, this low-cost strategy outperforms those who pay high investing fees. We don’t want to make too much of a single year’s results; it’s possible that the uber-wealthy (the top 1 percent of investors in this study synced $5 million or more) aren’t better investors than everyone else; they could have gotten lucky.
Nonetheless, the top 1 percent may exhibit certain behaviors worth emulating. A 2013 Fidelity Millionaire Outlook study of Generation X/Y investors (those aged 48 or younger with investable assets of at least $1 million, excluding workplace retirement accounts) found they are highly involved in how their assets are invested. That doesn’t mean they are on the phone with their adviser 10 times a day, but they do understand how the stock markets work and know the importance of creating a plan and sticking with it. Here are three investing habits that could benefit anyone.
1. Keep Emotions in Check
Human emotions are hard to control — and that’s particularly true when it comes to money. Panic can easily set in and is often the reason investors buy high and sell low. “People tolerate risk very well when the markets are popping up but when they are going down, risk suddenly becomes the enemy,” says Taylor Gang, principal wealth manager at Evensky & Katz / Foldes Financial Wealth Management, which manages about $1.6 billion in assets for clients with assets anywhere from $1 million to $10 million. “The key is to prevent this human emotion from taking over and that’s where many 1 percenters succeed.”
Moving in and out of stocks to chase the market’s ups and downs may seem like a smart plan, but in the long run, being disciplined wins the race. In 2014, the median 1-percenter had portfolio turnover of 10 percent — while everyone else churned their portfolio 13 percent.
2. Invest with Taxes in Consideration
Nobody likes to pay taxes, yet many investors ignore the tax ramifications of their investing decisions. That could turn out quite expensive for those in the top tax bracket. “When you are looking at a 35 percent capital gains tax, when the average person has 10 percent to 15 percent, you have to become tax savvy,” says Kimberly Foss, founder of Empyrion Wealth Management, who manages money for individuals with $3 million or more in investable assets.
Because of that, many high-net-worth investors employ tax-advantaged strategies that help their performance and keep their tax rate in check. Consider this: the 1 percent are five times more likely to own Vanguard’s Intermediate-Term Tax-Exempt Fund (VWIUX) than the 99 percent.
3. Don’t Time the Market or Be Swept Up by Hype
“Successful investors are often skeptical,” says Gang. “They do the appropriate amount of due diligence and they investigate and make decisions with the benefit of information.” Consider this: Alibaba (BABA), the Chinese e-commerce company, was the hottest IPO of 2014, yet the top 1 percent were only half as likely to own that stock at the end of 2014 as the rest of us. An IPO may seem attractive — after all, you are getting in on a company poised for growth — but often that’s already priced into the shares and the ones who will benefit are those who held a piece of the company when it was private.
“An IPO is not a great panacea,” says Jeremy Kisner, senior wealth adviser at Surevest Wealth Management, who manages investors with $1 million to $10 million in assets. “It’s a panacea for the people who held the stock when it was private.”
The 1 percent are also half as likely as the 99 percent to own Facebook (FB), Apple (AAPL), Twitter (TWTR) and Ford (F), and only a third as likely as the 99 percent to own Tesla (TSLA): stocks that otherwise top the popularity charts among everyday investors. So what are they most likely to own? It comes as no surprise, perhaps, that on top of that list is Warren Buffett’s Berkshire Hathaway Class A shares (BRK-A), which traded at $224,675 at close on Jan. 8.
There is No Secret Sauce
Of course, being wealthy doesn’t make one immune to bad investing decisions at all. In this study, for example, the top 1 percent are just as likely to be overly exposed to equities vs. bonds relative to their risk profile (according to SigFig’s data and risk assessment questionnaire). And they pay on average 17 percent more in fees as a percentage of assets, translating to $8,000 a year in investing costs that are often easily avoidable.
As Buffett wrote in his 2013 letter to shareholders, “The goal of the non-professional [investor] should not be to pick winners — neither he nor his ‘helpers’ can do that — but should rather be to own a cross-section of businesses that in aggregate are bound to do well.”
Donna Fuscaldo is a contributing writer at SigFig. Nearly a million people use SigFig to track, improve and manage over $300 billion in investments.