When it comes to investing, it’s always interesting to learn from those who have achieved great success in managing their finances. While there’s no one-size-fits-all strategy for investing, we can gain some insights by looking at the investment habits of wealthy families. In a recent study by Vanguard, one of the largest money managers in the world, they examined the investment patterns of wealthy families and here’s what they found.
Asset allocation is a critical aspect of investing and is the process of dividing your investment portfolio among different asset classes, such as shares, bonds, and cash, based on your investment goals, risk tolerance, and time horizon. According to the Vanguard study, wealthy families tend to have a diversified investment portfolio, with a significant portion invested in shares. On average, wealthy families allocate 65% of their investments to shares, 25% to bonds, and 10% to cash.
The study also revealed that the asset allocation varies based on age. Younger families, those under 45 years, have a higher share allocation of about 75%, while older families, those over 65 years, have a lower equity allocation of 60% and an increased bond exposure of up to 30% once they retire.
Timing the Market
Timing the market refers to the strategy of buying and selling stocks based on trying to predict the future movement of the market. Wealthy families, according to the Vanguard study, tend to avoid market timing and invest for the long term. Only 50% of wealthy households traded their investments within a year, and of that, they only traded 10% of their total assets.
This strategy aligns with the investment philosophy of Warren Buffet, one of the most successful investors of all time. Buffet has always emphasized the importance of long-term investing, stating that “our favourite holding period is forever.”
Stock picking is the process of selecting individual stocks based on specific criteria, such as market trends or financial ratios. Most wealthy families use unit trusts instead of owning individual stocks. Only 1/3 of wealthy families own individual shares.
The study also revealed that wealthy families still own active funds, with 77% of households investing in actively managed funds. However, there has been a significant shift to passive investing in recent years, with the rise of exchange-traded funds (ETFs) and index funds.
While the investment habits of wealthy families may not be applicable to everyone, there are some valuable insights to be gained from their investment strategies. Diversification, a long-term investing mindset, and a focus on asset allocation are some of the key takeaways from the Vanguard study. In the end, the most critical factor in investing is to have a plan and stick to it, no matter what the market conditions may be.
Written by Warren Ingram
CFP®, Wealth Manager, public speaker and author. Host of the HonestMoney podcast. FPI South Africa Financial Planner of the Year 2011.