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Research has found a few common investing strategies used by wealthy Americans. Here are the details on how millionaires invest their money.
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Many of us have been interested in how the richest Americans invest their money. It’s normal to wonder if there’s anything we can learn from them or if they have access to special investments that everyone else doesn’t.
Recent research has revealed some key insights on this subject. Brokerage firm Vanguard analyzed the investing behaviors of affluent households in its 2020 report, “How America Invests.” The report looked at households with assets of $500,000 or more, but the median account balance was $1.034 million.
A few investing behaviors stood out. And while it’s a good idea to put at least some of them into practice with your own portfolio, not all of the ways millionaires invest are worth adopting. Here’s what Vanguard found (all the Vanguard data below is from Dec. 31, 2019).
1. They have stock-heavy portfolios
Investors, and especially new investors, often want to know where the best place to put their money is. While affluent households hold a mix of assets, they’re most heavily invested in stocks. Here was their portfolio allocation:
64% stocks23% bonds13% cash
Younger affluent investors have an even larger stock allocation. Those below the age of 45 have a median stock allocation of 84%, and those between 45 and 54 keep 78% of their portfolio in stocks.
Some people worry about investing in stocks because of the risk involved. However, if you’re a long-term investor, this isn’t as risky as you might think. Historically, the average stock market return is about 10% per year. While it can be volatile from year to year, if you’re investing for 10 years or longer, it’s very likely that you’ll do well.
2. They favor domestic stocks and bonds
International stocks and bonds are a way to diversify your portfolio. Vanguard recommends investing at least 20% of your portfolio in international stocks and bonds. It says having about 40% of your stock allocation in international stocks and 30% international bond allocation is even better.
Affluent households don’t quite reach those numbers. Their average stock allocation is 81% in domestic stocks and 19% in international stocks. Allocation is the same for domestic and international bonds.
Which is the better approach? In recent years, the U.S. stock market has been the superior choice. It has outperformed international stocks in eight out of the last 10 years, according to analysis by BlackRock. But it’s not such a large difference if we look at a longer time period. From 1973 to 2022, U.S. stocks outperformed international stocks 59% of the time.
One of the main advantages of international stocks and bonds is that they can stabilize your portfolio when the U.S. stock and bond markets are down. You may want to check out brokers for international trading if that’s of interest to you. But you don’t need international exposure to have success with investing, especially if you don’t mind weathering some volatility.
3. They have a mix of active and passive investments
Vanguard’s report also looked at whether affluent households used active or passive investing strategies. It classified active investments as actively managed funds, meaning those with a fund manager making decisions, as well as selecting individual stocks. Passive investments, also known as index investments, are those that track a specific market index or section of the stock market.
Most affluent households went with a mix of active and passive investing. Here was the exact breakdown:
7% had only active investments16% had only index (passive) investments76% had a mix of active and passive investments
This is interesting because active investing usually isn’t the best choice for the typical investor. Actively managed funds have much higher fees than passive index funds. Despite those higher costs, nearly 80% of active funds underperform the market.
For most investors, the simplest and most effective option is to build a portfolio of quality index funds. You’ll keep fees to a minimum this way. If you want to actively invest, you could do so by adding individual stocks to your portfolio. But it’s usually best to avoid actively managed funds because of the fees they charge.
To recap, the one millionaire investment strategy you should definitely use is investing in the stock market. It’s also a good idea to invest heavily in domestic stocks, although you can add some international stocks if you want more diversification. While most millionaires actively invest to at least some degree, that’s not a must, as you can also do just fine with purely passive investing.
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