Our experts choose the best products and services to help make smart decisions with your money (here's how). In some cases, we receive a commission from our partners; however, our opinions are our own. Terms apply to offers listed on this page.
Finance blogger Phil DeMuth of Forbesshares the chart below from IPI.
Advertisem*nt
The chart shows the results of a survey of super-rich folks--families with $200 million or more--are currently investing their assets.
The chart reveals, among other things, that those with $200+ million are:
- Highly diversified (probably over-diversified)
- Throwing money away on huge and value-destroying investment-management fees
Here's the chart:
Mr. DeMuth wisely gloms on to the fact that the $200+ millionaires have a big chunk of their assets (~30%) invested in the flavor of the day: Hedge funds and private-equity funds.
Because of the massive fees charged by hedge funds and private-equity funds, most hedge funds and private-equity funds lag the market over the long term, especially after tax. These hedge-funds and private-equity funds, in fact, are spectacular at only one thing: Generating extraordinary wealth for their managers, while producing average (or worse) returns for their investors. (Some hedge funds also generate spectacular returns for their investors, but relatively few.)
Hedge fund and private-equity fund investors haven't realized that yet, though, or don't care. So they're happy to pay hedge fund managers huge pots of money to generate lower returns than they could have gotten in exchange-traded, tax-efficient index funds.
DeMuth observes that the $200+ millionaires earned an average return of 10% last year.
Advertisem*nt
He then observes that, had the same investors junked their hedge funds and private-equity funds and instead invested in similar exchange-traded funds, they would have earned an 11.7% return.
In other words, DeMuth observes, each of these investors threw away $3.4 million last year in needless fees and lost returns,
Yes, every year is different.
Sometimes, funds that are "hedged" or "leveraged" or allocated to different asset mixes produce very different returns than the overall indices. And, sometimes, in a given year, some of these funds produce returns that are better than the market average (though not this year).
Advertisem*nt
But these funds also siphon off spectacular amounts of money each year just for creating the perception of diversification.
Any investor who allocates money directly to different asset classes via low-cost vehicles can achieve this diversification for much less cost: Just open an account at Schwab, Vanguard, or Fidelity and buy the desired index funds.
But good luck convincing the $200+ millionaires of that!
They've been so persuaded by their advisors and managers that they're getting "special" funds that ordinary schmoes can't buy that they'll never even notice the missing returns.
Advertisem*nt
After all, these $200+ millionaires are used to the cost-quality equation that prevails in most other industries: When you pay more, you get better quality.
They haven't yet figured out that, in the investment management industry, it's the reverse: When you pay more, you usually get less!
Perhaps these $200+ millionaires should read a $10 book by John Bogle, which will explain it to them.
Or they can just start by reading Phil DeMuth's column, which is here.
Executive Chair and Co-Founder
Henry Blodget is cofounder and Executive Chair of the Board of Insider Inc. He is also an occasional columnist (see below).Business Insider is a global journalism organization with more than 700 staff members and offices and affiliates in more than 17 countries. Insider's publications and programming reach more than 300 million people worldwide each month.Henry started Insider Inc., then called "Silicon Alley Insider," in the loading dock of another New York-based startup in 2007. He served as CEO and Editor in Chief until 2017. Insider was initially funded by RRE Ventures, Institutional Venture Partners, Jeff Bezos, and other investors. Insider Inc. is now owner by Axel Springer, the leading digital publisher in Europe.A former top-ranked Wall Street analyst, Henry is often a guest on CNBC, CNN, MSNBC, NPR, and other networks. He has contributed to The Atlantic, Slate, The New York Times, Fortune, New York, the Financial Times, and other publications. He has written extensively about technology and investing and is the author of "The Wall Street Self-Defense Manual: A Consumer's Guide to Investing." During the dot-com boom of the late 1990s, Henry was a top-ranked Wall Street internet analyst. He was later keelhauled by then-Attorney General Eliot Spitzer over conflicts of interest between the research and banking divisions of brokerage firms.Henry received a B.A. from Yale University. He was born in New York.Disclosure: Henry believes that frequent trading is a lousy investment strategy for individual investors. He primarily invests in a portfolio of low-cost, tax-efficient index funds. This said, as a legacy of his days as a stock analyst, Henry also has positions in stocks like Amazon, Apple, Microsoft, and other companies. Henry is also an investor in Business Insider.
