Personal Finance

What really sets wealthy investors apart

Do you need a financial therapist?
Do you need a financial therapist?

It is tempting to think that the very rich possess some extra skill, one that would let all of us amass great wealth if we could just get our hands on it.

A new study by SigFig, an online portfolio manager, makes that idea even more tantalizing. SigFig examined a sample of 330,000 investors with total assets of nearly $147 billion and found that the wealthiest 25 percent were investing very differently from the quartile with the least wealth.

In fact, the wealthiest 25 percent of the investors SigFig surveyed were much more likely to follow practices typically recommended by financial advisors: they focused more on low fees, abstained more often from panic selling, and appeared to trade less often. The wealthiest investors also saw significantly better investment returns.

"Turnover has been shown time and again to impact returns, because you try to time the market and you can't do that. Trying to sell when there's a downturn — that's a sign of emotional investing rather than having a plan," said Tomas Pueyo, SigFig's vice president of product and growth, adding that the wealthy investors were steering clear of those practices.

An earlier study, by the CFP Board, also found that people with a comprehensive financial plan tended to be the most affluent population segment, with 46 percent reporting household income of at least $100,000.

SigFig, in its report, steered clear of attributing the wealthiest quartile's investment success to a set of behaviors. "We cannot prove a causation, but the correlation is there," Pueyo said. "Thinking it through, it's pretty clear that they are linked."

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It is possible that the wealthiest investors simply had access to better investment options, so they had an easier time when it came to establishing their investment practices and thus an edge when it came to investment performance.

For example, wealthier investors have the means to invest in fund classes that carry lower fees. At Vanguard, for example, the Admiral Shares fund class has fees that are 16 percent lower, on average, than the firm's Investor Class shares. Admiral Shares also have a sizable investment minimum, $10,000 in most index funds, and as much as $100,000 in some index funds focused on specific sectors. Investor Class shares have investment minimums ranging from $1,000 for target-date funds to $3,000 for most other funds.

Pueyo chalked up some of the difference in the fees the different groups of investors were paying to financial education, noting that when it came to exchange-traded funds, the bottom quartile of investors appear to "choose to have the riskier ones that have higher expense ratios." For example, some 21 percent of the lowest quartile paid more than 0.5 percent in ETF expenses and 9 percent paid more than 5 percent in mutual fund load fees. That compared to 11 percent of wealthy investors who paid more than 0.5 percent in ETF expenses and 3 percent who were charged 5 percent in load fees.

In addition, wealthy investors by definition are more likely to be able to afford a personal financial advisor to guide them and help them maintain investment discipline. Pueyo pointed out that many financial advisors will only accept clients with a minimum amount of assets, often $500,000 or $1 million.

It is telling that the wealthiest investors in the SigFig survey were far more likely to follow typical financial advisor advice about issues like panic selling in a market downturn: just 16 percent sold more than 10 percent of their portfolio in the August market turmoil, compared to 61 percent of the investors in the bottom 25 percent of the survey.

Also worth noting is the fact that the wealthiest investors in the survey could do far more than hire a financial advisor: their average wealth of $1.6 million was 348 times the $4,600 average wealth of the lowest quartile. With so little in reserve as investment holdings, people in the bottom quartile may simply have been more focused on immediate needs than on long-term financial planning.

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Still, the behaviors exhibited by the wealthy investors are generally recommended, for good reason. For example, trading less naturally results in fewer transaction fees and fewer short term capital gains. Paying attention to fees shaves a little off the cost of investing.

And avoiding panic selling in a downturn generally pays off. Earlier research by SigFig found that the people who sold more than 90 percent of their portfolio in the August 2015 market turmoil had median trailing 12-month returns of -18 percent, compared to -4.6 percent for those who did nothing.

The very rich may be "different from you and me," as F. Scott Fitzgerald put it. But imitating them could pay off.