If you had more money to invest, would you get better investment results? It’s tempting to think so, and you might be intrigued about the research on exactly that question. 3 top professors did the study, and here’s what they found.
Steady there, Eddie…
Let’s jump to the study’s conclusion. No, the rich are not smarter investors. They make the same mistakes less wealthy investors do. They chase fads, sell in a panic, buy at top, hold too much cash, and invest as if the past is always the same as the future.
They do get some things right, namely, diversification and rebalancing. They also seem to invest for the long term, lowering their tax rates in the process.
Despite the lure of ‘private’ investments, ‘special’ access, and ‘exclusive’ offerings they take less advantage of them than one might think. These investments often do not pan out as advertised, hurting investment results.
There is some short term evidence that the ultra-wealthy do achieve better results than average. Perhaps, but personally, I discount the idea because of ‘survivorship bias’ reporting. Yes, the ‘average’ billionaire was up big time in 2013, but Brazil’s wealthiest man for example, Eike Batista, also lost $34 billion in 2013, a 99% decline. You decide.
If more money is not the turbine driving investment success, then what is? Avoiding bad habits is a big investment plus. Behavioral finance studies show that investors routinely self-inflict damage through overconfidence (“I’m a success, I can manage money, too!”), illusion (“I know exactly what is going to happen in the future!”), and selective memory (“I’ve never lost any money!”) to name a few avoidable traits. Practicing good habits – diversification, rebalancing, cost control and tax efficiency are big pluses, and that’s exactly how Osbon Capital is organized.
Give us a call at 617-217-2772 – we’d love to hear what’s on your mind