How the rich invest

The results were surprising.

Wealth paradox

It’s often assumed that wealthy people became so because they are good at investing and willing to take risks in pursuit of high returns. But in what the report calls ‘’the wealth paradox’’, the opposite seems to be true.

While many of them have acquired wealth by taking risks building a business, that doesn’t automatically translate into their investment behavior.

Most of these wealthy individuals invested in just three assets classes: Australian shares, Australian residential property and cash.

Table 1: Where the rich invest

Cash (eg savings accounts and term deposits)	81.2%
Australian shares	56.4%
Direct residential property (excl. family home)	41.6%
International shares	23.1%
Property/real estate investment trusts	21.1%
Collectibles (eg art, antiques)	18.6%
Alternative and/or emerging investments	14.6%
Australian bonds	13.5%
Direct commercial property	10.3%
International bonds	9.8%

Source: CoreData

Most of those surveyed described themselves as cautious and only willing to tolerate a low to moderate level of risk. Yet the majority were exposed to one of the biggest risks of all.

Exposed to major losses

“We call these investors risk-averse risk-takers; they are taking risks they may not even be aware of because of a lack of diversification,” says Clark Morgan, Crestone Vice Chairman and Head of Strategy and Development.

If Australian shares and property were to fall at the same time, given the amount of money at risk these investors could be exposed to major losses.

Younger investors with a lengthy time horizon might be banking on riding out the short-term peaks and troughs. But people nearing retirement or newly retired could take a hit to their retirement income that would be difficult to replace. Indeed, this is what happened in the immediate aftermath of the GFC.

And then there’s the so-called safety of cash. With the official cash rate at 1%, rates for term deposits not much better and inflation running at 1.3% in early 2019, cash investments are going backwards. Having a certain amount of money ‘at call’ in cash is necessary. But far from being risk-free it’s a high-risk strategy to have too much in cash.

The fear factor

In many ways it’s understandable that older investors err on the side of caution. They have less time to make up lost ground if markets experience a major downturn.

“As we get older, I get more and more paranoid about us not having enough money to last till we die… I’m very cautious.” (Female, 54, Melbourne.)

What’s more, the tried and true formula of investing in bricks and mortar and fully franked shares has worked well over the long term. Even so, there is some cognitive dissonance going on.

Around a third of respondents thought investment markets would be worse in 2019 while a similar number thought there would be no change. And over half of respondents thought property prices will fall in 2019. Victorians were especially bearish, with 63.2% thinking property prices will fall.

So where were wealthy Australians more likely to invest in 2019? You guessed it, Australian shares (38.8%) and residential property (31.9%). And despite historically low interest rates – 44.1% nominated cash.

The generation gap

For whatever reason, the message about diversification appears to be getting through to younger investors.

Gen Y (aged 37 or younger) were most likely to have a broad range of asset classes, including Australian bonds and alternative and/or emerging investments (both held by 26.2% of wealthy Gen Y investors).

The reasons for this are not clear, but it may have something to do with their willingness to adopt new technology and mobile trading platforms. These typically offer ready access not just to shares but to ETFs (exchange-traded funds) covering a wide range of asset classes and geographic locations.

Older investors may have already established their investment preferences and behaviour.

GenY were also the most upbeat about the outlook for economies and investment markets, well over half expecting an upturn in 2019. They were the most enthusiastic about all asset classes but, oddly given their age and distant time horizon, almost 60% said they were more likely to invest in cash this year. This was followed by Australian shares and property trusts at around 57% each.

The most glum about the domestic and global economies were Gen X (aged 38 to 52), with less than a quarter expecting them to perform better this year. Baby Boomers (53 to 72) were the most pessimistic about investment markets, with only 24% expecting an upturn.

The millionaire next door

More than one million Australians have more than $1million in investible assets, which means you or the person next door could be one of them without knowing it.

Indeed, many people in CoreData’s focus groups expressed surprise at how much money they had, in a frog-in-boiling-water kind of way.

Clark Morgan said people in the focus groups often commented that they had always wanted to be comfortable, and managed money carefully along the way, but were surprised how much they had ended up with.

This response was typical:

Despite their higher-than-average wealth, their motivation for investing was typical of most Australians. Over 70% cited saving for retirement as one of their top three reasons, followed by wealth accumulation and supporting the family financially.

As you might expect though, there were marked generational differences. Gen Y were the most likely to invest as a hobby or for enjoyment (31.6%), while Baby Boomers were the most focused on retirement (83.3%) and wealth preservation (53.6%).

In many ways, the research suggests the rich are not so different from their neighbours when it comes to how and where they invest.

If you want an insight into how they invest, try looking in the mirror.