But what I am really excited about this time around is the very enlightening graphic Ritholtz presents in his "Sunday Reads" column on today's The Big Picture in which he illustrates what a typical wealthy person's portfolio (presumably the 1%) looks like. This singular graphic is a course all in itself on smart investment strategies. I am pasting the link directly below so you see it first.
10 Sunday Reads 032016 - The Big Picture
So what does this tell us? First, there is a nicely diversified allocation here that would be wise for anyone to follow regardless of net worth. The wealthy person is a little more than 1/4 in the market (stocks & bond), which was a surprise because you'd think there would be considerably more than that. Then there was the compensation derived from employment (whether it's their own business or they're a CEO or senior management of another company) which again is lower than you'd think, about 1/5. So even though the wealthy get paid high salaries, these salaries only make up a fairly minor part of their overall worth. The rest all comes from investments, the same investments that are accessible to all income classes. The big surprise is that 35% of their wealth comes from real estate. They own very expensive houses and secondary vacation homes. This makes a lot of sense from the point of view that real estate, with the exception of this Great Recession, though it returns a little less than the stock market overall (7% annually vs 8%), it is much more stable than the stock market and therefore the wealthy put more of their money there. It's very interesting to note that they keep to the conventional formula that your rent/mortgage should be about (or more specifically no more) than one week's pay each month. This is also a general truism regardless of income class. You can see clearly here that, as far as the homes they actually live in, they are the equivalent of 1/4 of their worth. Clearly they see an advantage to buying as much home as that 1/4 will provide in terms of investment.
But the story gets even better. They also invest another 10% into other real estate, presumably income properties. Obviously they see real estate as an excellent way to spread their risks. It's not a tremendous amount more, about 40% over what they have in stocks and bonds, but enough to testify that they see it as a safer haven.
Then there is the 3% that they have invested in precious metals and rare collectibles. This is the all-important hedge against recession (let alone depression) that everyone should have in their portfolios. Though collectibles are a specialization that no one should seriously dabble in unless they really know what they're doing, gold and silver are pretty much a no-brainer. Metals are always going to be a valuable asset when the market tanks so it's not at all unwise to have a good 3% of your portfolio in this area. (Just don't buy it at the height of the hysteria. Anybody who jumped in when the fever was at its pitch in 2008 lost a good 40% by now.) In fact, when times are hard, most advisers don't think it at all imprudent to be invested as high as 10% in gold and silver.
But the biggest surprise by far was the cash allocation. The wealthiest have on average 15% of everything sitting in cash. Is it sitting in cash doing nothing? Not at all. It is sitting in cash waiting for the right buying opportunity. Where people lose money is in finding a great opportunity and can't invest in it because they don't have enough cash. Besides which everyone should always have at least four months of emergency cash regardless. So it was to me the biggest surprise to see that the wealthiest were taking this traditional rule very much to heart. The world runs on cash and, when all else fails, cash is what we'll need the most. But beyond scenarios of tragedy, when all else succeeds, cash is the only way to buy in.
So you see this little picture (from The Big Picture) really does tell you everything you need to know about investing. Just do what the wealthy do: 28% in stocks and bonds, 24% in your home (or 35 in your home and other real estate), 19% from employment, 3% in metals, and a very nice 15% cushion in cash. What more do you need to know? Well, I guess I'm going to spend the next couple of years finding out. Hope everyone had a great weekend.
Succinct Summation of Week’s Events 3.18.16
Succinct Summations for the week ending March
18th 2016
Positives:
1. The S&P 500 gained 1% for the fifth consecutive week for the first time since April 2009.
2. Retail sales less autos and gas rose 0.3%, in line with expectations.
3. Core CPI rose 0.3% m/o/m or the second straight month.
4. Housing starts came in at 1.178mm SAAR, slightly above expectations.
5. Jobless claims remain low, coming in at 265k.
6. Consumer sentiment came in at 90, slightly lower than expected but still strong.
7. JOLTS came in at 5.541mm, down from 5.607mm previously.
Negatives:
1. Retail sales fell 0.1% m/o/m, in line with expectations but below the 0.2% rise previously.
2. Housing permits came in at 1.167mm SAAR, well below the 1.204mm expected.
3. Industrial production fell 0.5% m/o/m, down from the 0.9% previous rise.
4. MBA mortgage composite index fell 3.3% y/o/y.
First rule of running others’ money? Do no harm - The Big Picture
First rule of running others’ money? Do no harm
My Sunday Washington Post Business Section column is out. This
morning, we look at the debate on the Fiduciary rule.
The print version had the full headline First
rule of running others’ money? Do no harm, while the online version is The enlightened view on managing other people’s
money.
Although I strongly favor the fiduciary over suitability rules as
the regulatory standards for advisors, I wanted to explore what credible
arguments exist against the fiduciary standard. Suffice it to say I
struggled to find any rationale arguments opposed.
Here’s an excerpt from the column:
“In a 2011 study, the SEC staff published its conclusion that “all financial advisers and stock brokers should be placed under a uniform fiduciary standard.” This meant that brokers would have a clear legal obligation to put the interests of clients first — before even their own (gasp!) compensation. Further, anyone selling investment products or providing investment advice to the public must (gasp again!) disclose any conflicts of interest that might compromise that fiduciary duty.
That sounds like a reasonable set of rules. Doctors, after all, must “first, do no harm”; people who provide legal or accounting advice must put the interests of clients first as well. Why not apply those same standards to anyone who provides financial advice?
This is more than a mere matter of principle; a White House report found that conflicted investment advice costs the public about $17 billion a year in retirement accounts alone.”
This is an important issue that merits broad
public discussion.
(My note: This is the link to the rest of the article, well worth the read.)
Barry Ritholtz
Washington Post, March 20, 2016
wapo.st/1VlqCJ9
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