Recently, there was an article on CNNMoney that spoke about the
“secrets” of the elite rich in the United States. In turn,
several articles were written about this article, including one
that stated that the richest of Americans “built their wealth
with diversification, wealth preservation and strategic growth.”
That is a ridiculous statement in itself because two of those
strategies, diversification and preservation don’t help build
wealth. Perhaps the richest of Americans use these two
strategies to maintain an even keel AFTER they have accumulated
great wealth, but certainly they didn’t use them during the
accumulation phase. According to this article, a survey of
Northern Trust uncovered that the “richest Americans do not
heavily rely on high-risk investment vehicles like hedge funds
to make money, but are moderate risk takers who put more than
half of their asset allocation into U.S. stocks and cash.”
Again, just as former hedge fund manager and multi-millionaire
Jim Cramer said that he used certain financial journalists,
including ones employed by the Wall Street Journal, as pawns to
spread misinformation far and wide to benefit himself, again
this is an example of investment institutions using the media as
pawns to spread their myths to keep the masses of retail
investors ignorant. The CNNMoney article made it appear that the
richest of Americans built their wealth by being conservative
and slowly growing their money over time. That’s an oxymoron
right there. To state that the rich became rich by slowly
growing their money over time. Well, if they are slowly growing
their money and becoming even richer, then this implies that
they were rich to begin with. So how did they accumulate wealth?
Surely not by “slowly growing” their money.
Sure, some of the “richest Americans do not heavily rely on
high-risk investments” because they ARE ALREADY EXTREMELY RICH.
The majority of ultra-rich do NOT build their fortunes by
speculating on high-risk investments as is commonly believed.
Often they build fortunes utilizing volatile assets and
investments but that does NOT mean they were engaging in risky
behavior. Many times, investing in a hedge fund can be much
riskier than investing in some of the assets that your
investment firm will tell you is “risky”. But investment firms
will gladly place a portion of your money in hedge funds because
the fees they earn from hedge funds are so high even as they
advise you not to put your money in a much less risky investment
with much greater earning potential. And THIS IS THE SECRET that
investment firms never tell you.
Volatile assets that often can be used to build great wealth
are NOT RISKY if they are purchased at entry points that are
extremely favorable and provide a low-risk point of entry. 99%
of investors don’t understand what high-risk investments truly
are because they have been misinformed by their advisors and
their firms for the past half of a century. Purchasing volatile
assets at low risk-high reward entry points greatly mitigates
and neutralizes the great majority of risk of volatile assets.
If you don’t understand this concept then you need to.
Many millionaires that are wealthy but that could be extremely
wealthy fail to build enormous wealth because investment and
financial institutions mislead them about certain investment
opportunities and describe them as complex and risky and are
able to convince their clients of this belief because they never
properly explain risk-reward scenarios to their clients.
However, those investors that are extremely wealthy are the rare
breed that understand this concept. If investors had a choice
between allocating $1,000,000 in a historically volatile
Investment A that has a 78% chance of returning a 250% gain
versus an Investment B that has a 95% chance of earning 9%, most
investors would choose Investment A.
However, because Investment A may exhibit 50% more volatility
than Investment B, the great majority of advisors would steer
their client away from the former investment into the latter
one. In fact, this is exactly what even “prestigious” firms that
cater to ultra high net-worth clients do because they allow
misinformed, uneducated investors dictate the rules of
engagement to them, and they would much rather appease such
powerful, important people with slow,minimal gains rather than
empower and enlighten them and boost their returns like never
before. They would choose to steer them away because they
present the investment opportunities incorrectly, merely telling
their client that while they could earn 350% from Investment A
there was also a very realistic probability that they could lose
$300,000, and that shooting for the slow but steady $90,000 a
year is much better for them.
If you are thinking to yourself, “That makes absolutely no
sense?” Why would firms not earn 20% a year for their clients if
they could instead of 8% a year? The answer is because the
overwhelming majority of investment firms, no matter how
prestigious their brand, are merely highly glorified sales
machines. They fail to convince clients to invest in phenomenal
investment opportunities that sometimes arise like Investment A
because in order for Investment A to be a moderate risk, very
high reward investment, it must be entered at a low risk entry
point so that the probability of being down $300,000 at any give
time would be reduced from perhaps 50% to 20%.
And that even if their timing is not optimal, then a firm must
educate the client that as long as they don’t panic when they
are down, the odds are still extremely high that they will earn
a 250% or better gain. However, the greatest factor that
determines why firms will not seek this strategy is time.
Engaging in much better strategies such as these for their
clients would take massive amounts of time in client education
and enough time in research that the amount of assets gathered
would take a serious hit.
So because it is not in a firm’s interest to engage in
activities that maximize portfolio returns (unless it is their
own institutional portfolio), instead, we have Chief Investment
Officers at top investment firms making statements like,
“"Generally they [the richest of Americans] want to see
prudently managed growth without a lot of surprises, which is
why we emphasize diversification." Again, this is a sales &
marketing campaign statement, not an aboveboard statement about
how to make money for clients.
If clients are uncomfortable with strategies that would
actually built great wealth for them instead of producing
mediocre or subpar returns, their discomfort only originates
from the fact that the largest investment firms have been
deceiving their clients, just as Jim Cramer had deceived the
thundering sheep herd for years, about the realities of building
wealth. This discomfort originates solely from the fact that he
or she has been kept in the dark for so long. Thus, we have a
misinformation-driven cauldron of investors making bad
investment decisions that exists today. In 2007, you’ll still
find Chief Investment Officers of very well known firms making
ridiculous statement that investors need to invest at least 50%
of their stock portfolio in U.S. stocks if they wish to grow
their portfolios exponentially.
How are they going to grow their portfolios exponentially with
more than half of their stocks in a stock market (the U.S.) that
has NEVER been the best performing market in the past 25 years
(even among developed stock markets)? How will they grow their
portfolios exponentially by buying stocks in market that trades
in what is quite possibly the worst currency on earth among
developed markets (the U.S. dollar)? Yes I know that when the
U.S. dollar shows a brief spike in strength as is likely to
happen soon (I’m writing this article in April, 2007), that many
people will question what I am saying, but this is only again
because they are victims to the mass deception mind-games of the
investment industry. I suppose if planning to earn better than
subpar returns in your stock portfolio is engaging in risky
behavior as Chief Investment Officers of various firms claim,
then yes, I whole-heartedly endorse engaging in risky behavior.
And because so many people, yes, even those considered quite
wealthy, fall victim to the preaching of investment industry
demagogues, there is a second mistake that many rich investors
will soon make. Another survey of wealthy U.S. investors
uncovered that a large percentage of investors with investment
assets of over a million do not employ any type of investment
advisor but plan to do so soon giving the increasingly gloomy
nature of the U.S. stock markets. To that, this is what I have
to say. Making money in difficult markets is ten times more
difficult than making money in bull markets. If investors
believe that it will be increasingly more difficult to make
money in U.S. stock markets, but yet top investment firms in the
U.S. continue to preach that more than half of your portfolio
should be in U.S. stocks (mostly to cover their respective
firm’s inadequate coverage of emerging markets), how is the
hiring one of these men possibly going to improve these
investors’ future performance outlook?
But there is an EXTREMELY important distinction to be made
here. What I’ve written above applies to the behavior and
mindset of some of the richest people in America, but not THE
very richest people in America. The very richest people in
America, those you might categorize as the world’s ultra-rich,
possess a very different mindset and behavior set than those
that are just rich. The ultra-rich have positioned their
portfolios extremely differently from how the rich people
discussed above have positioned their portfolios. The reason why
articles regarding their behavior and investment decisions are
virtually non-existent is because they don’t grant interviews
and they don’t want people to know what they are doing. But I’ve
investigated what they are doing, and trust me, it is nothing
remotely similar to the behavior of wealthy investors described
by Northern Trust and other investment firms.
If you would like to find out why the ultra-rich always manage
their own money or are able to find the 1 in a million
consultant truly capable of providing them the returns they
desire, consult our resource of “101 Reasons Why Managing Your
Own Money is the Only Way to Build Wealth.” Even if the
ultra-wealthy have someone managing their money for them, the
only way they were capable of finding this 1 in a million
financial consultant was due to the fact that if they had to,
they could manage their own money successfully as well. Only by
first fully understanding the most successful investment
strategies themselves were they able to identify an advisor
capable of employing similar strategies. However, a great
majority of ultra-wealthy continue to handle and make their own
investment decisions. And that is precisely why they are among
the elite.
About the Author: J.S. Kim is the founder and managing director
of SmartKnowledgeU™, LLC. Please visit
http://www.smartknowledgeu.com to learn the safest places to
invest money and how to achieve financial freedom.
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