For anyone who ever felt bad about the fact that their stock trading could serve as a road map for how not to make money, here is some comfort: Really rich people make the same mistakes managing their money as everyone else. Unless they’re really, really rich.
A group of researchers including Enrichetta Ravina, an economist at Columbia Business School, Luis Viceira of Harvard, and Ingo Walter of the Stern School of Business at New York University analyzed households with an average net worth of $90 million during the years 2000 to 2009. They looked at where such folks put their money, how diversified it was, the level of risk they took, and the taxes they paid on their earnings. They found that most of the ultrawealthy aren’t privy to a secret formula that helps ensure profit no matter the market conditions. They make about an equal share of dumb mistakes.
For one, they are more than willing to pile into the latest faddish investment, according to the Financial Times. For example, they poured money into hedge funds after 2005 when most funds had already reached their peak, and they piled into mortgage securities right before the bubble burst. One thing that wealthy investors have been doing right, according to the researchers, is regularly rebalancing their portfolios to maintain consistent proportions of their assets in different classes such as stocks, bonds, and alternative investments like hedge funds and private equity funds. This is a prudent habit that forces investors to sell some of their holdings after they run up in value and to buy others that have declined—although, the rich folks didn’t seem to do this after the market collapse of 2008 and instead engaged in panic selling like everyone else.
But: The very richest among the group—the top 10 percent of the research sample—resisted this urge. Exhibiting what might be described as billionaire’s telepathy, many of them started liquidating their investments in 2007, thereby avoiding the financial bloodbath that swept up nearly everyone else in 2008 and beyond. This might help explain why, even as the top 1 percent of Americans have done multitudes better than the bottom 99 percent over the last 20 years, the incomes of the top 0.01 percent have gone up even more, rising 32 percent in 2012 alone.