You and I are advised to put our money into simple portfolios [1] and to invest in shares for the long-term [2] for our retirement.
But once the preservation of wealth becomes more important than growing it, other strategies come into play.
The preservation of wealth for the super-rich usually entails:
- Wide diversification [3] at the expense of higher returns
- Reduced volatility [4]
- A focus on real assets such as property [5] and gold
- Investment in illiquid [6] and unlisted securities and companies
- Paranoia over taxes
In fact, I doubt there’s a rich person in the world getting by with an index tracker [7], a savings account, and a wodge of Government bonds [8].
Risky businessmen
Firstly, let’s define the sort of millionaires we’re talking about.
I’m thinking riches well beyond the standard Millionaire Next Door [9]
Let’s say a net worth greater than £10 million/ $15 million.
Now, not all these very rich people practice the preservation of wealth through diversification.
Many self-made entrepreneurs retain a huge slug of the businesses they founded, for example. This makes their net worth very dependent on the day-to-day value of those businesses.
Take Bill Gates. The world’s sometime richest man has diversified into everything from biotech firms to Warren Buffett’s [11] Berkshire Hathaway to Corbis, his digital picture library. Yet despite selling millions of Microsoft shares every quarter, he is still the company’s biggest single shareholder. His 8% holding is worth $17 billion. If Microsoft goes bust, Gates will plunge down the rich list.
The insanely rich like Gates, Warren Buffett and Carlos Slim [12] – the Mexican tycoon who’s currently the world’s richest man – can afford to take their chances. While in percentage terms the wealth tied up in their businesses is huge, the lesser share of money held outside is still enough to ensure a very prosperous lifestyle, whatever happens to their core company.
Such entrepreneurs got rich by being risk-takers. It’s not surprising they are comfortable continuing to take risks afterward.
But it’s also worth noting that lots of very rich people are simply badly advised or ignorant about money, especially the recently rich.
Many famous sports professionals go from millionaire status [13] to bankruptcy [14] in just a few years. They typically manage this by putting their cash into do-or-die business ventures they’ve no ability to evaluate, as well as by leaking money to friends, family, and advisers as quickly in retirement as when they were still earning millions.
Avoid their example if you want to stay rich!
How an old money dynasty stays wealthy
What we’re really interested in are the moneyed upper classes who remain rich from year-to-year and across the generations.
A great insight into their investing comes via the reports of RIT Capital Partners [15] – the Rothschild family’s investment trust.
Listed on the London stock market, anyone can buy shares in the Rothschild’s trust. As a result it’s obligated to report on its activities, like any other company.
And what is very clear if you read its annual reports is that Lord Rothschild does not believe a stock market tracker, some gilts and a wodge of cash is sufficient to guarantee his heirs a chunk of the Rothschild fortune. Far from it!
Here’s how RIT Capital Partners’ assets were allocated as of March 2010:
[16]
Now that’s what I call diversification! The unquoted investments alone include all sorts of weird and wonderful stuff, from Brazilian farmland to a newly established Norwegian oil explorer to a 50% stake in The Economist.
Another notable aspect to Rothschild’s strategy is currency diversification:
[17]
As you can see, the trust shifts its exposure to different currencies a great deal from year to year. This isn’t so much about trying to make money from currency swings as it is about the preservation of wealth.
Diversification is everything
As Rothschild’s trust demonstrates, the key to wealth preservation is massive diversification, to guard against all conceivable forms of investment failure [18]:
- Massive vertical diversification [19] – Investments across the waterfront of asset classes, from property, bonds, private equity and stocks to more exotic fare like unlisted businesses, land, art, antique furniture and intellectual property such as publishing rights.
- Massive horizontal diversification [20] – Holdings in the different asset classes are spread widely among baskets of stocks, different fund managers, various countries’ bonds, and indeed into different currencies.
- Political and legal diversification – Super-rich people are much more interested in taxes, the legality of their holdings, and political risk than you and me. They may have good reason to be more paranoid [21] in many cases. For this reason they tend to hold some of their assets offshore, including real assets like property or gold.
Coming soon – practical tips from the super rich on the preservation of wealth. If you want to ensure your heirs can blow their inheritance on strippers and sports cars, subscribe for free [22] to make sure you read it.
(Image by: Hamed [23])