Is investing different for the "rich"?

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Is investing different for the "rich"?

Postby DrDoodle » Thu May 02, 2013 7:49 pm

I'm very happy and comfortable with my very boglehead-y investment strategy, but I sometimes wonder if the "rules" that guide boglehead investing also apply to individuals with a lot (say, $10+ million) of money to invest. I'm not thinking about people like Warren Buffet who, by virtue of who they are, have the opportunity to invest in things, and on terms, that aren't available to ordinary folks. I'm thinking about the folks who have a portfolio of maybe $10+ million and are targeted by all of the wealth management companies that advertise in the New Yorker and elsewhere. Are they still playing around on the same risk-return frontier as the rest of us, or does having that much more money to play with and access to some other investment vehicles and tools mean that they are playing with a different risk-return frontier? Put differently: for a given level of risk, does having a $10 million portfolio allow you to create a higher expected return than if your portfolio is $500,000?
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Re: Is investing different for the "rich"?

Postby RenoJay » Thu May 02, 2013 7:56 pm

I'm not quite in the eight-figure club, but I can say that having a reasonably sized portfolio has affected my decisions in the following ways:

1. I keep more than my age in fixed income because I don't feel I need to experience as much of the volatility risk of equities as if I were needing to seriously grown my portfolio;

2. I get access to some high-returned fixed income deals that pay much better than any bonds I can find but require investments of around $100k - $200k each so these obviously would not be appropriate for people whose portfolios are sub $1 MM.

Other than that, all else is the same. I firmly believe in the Boglehead philosophy, I ignore calls from wealth advisers (I got cold called today by some guy in Texas pitching oil wells!), I think costs matter greatly and that timing the market or stock picking are fools' errands.
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Re: Is investing different for the "rich"?

Postby Calm Man » Thu May 02, 2013 8:04 pm

In my neck of the woods, the NY suburbs in NJ, 10 MM is not considered particularly rich as it is common. Certainly not considered poor of course. Most of my colleagues at the approximate 10 MM level use advisers. Some do not and of those probably a minority follow the Boglehead philosophy or have even heard of it. Some use dividend strategies or buy individual munis but they are fooling themselves.
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Re: Is investing different for the "rich"?

Postby otbricki » Thu May 02, 2013 8:12 pm

Larry's book on alternative investments made me suspect that they do invest differently. But not more effectively.

I think they get an edge with their tax accountants though.
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Re: Is investing different for the "rich"?

Postby musbane » Thu May 02, 2013 8:23 pm

RenoJay,
I hate to pry, and you're under no obligation to tell us, but I for one would be vastly interested to know what fixed income investments would be significantly superior to bonds.

I will be having several large 3% CDs coming due in the near future and while these may be better than bonds, they're also unobtainable now.

Is it possible that these investments fall into the 'more risk equals higher expected reward' category?
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Re: Is investing different for the "rich"?

Postby ProfessorX » Thu May 02, 2013 8:40 pm

DrDoodle wrote:Put differently: for a given level of risk, does having a $10 million portfolio allow you to create a higher expected return than if your portfolio is $500,000?


If you are investing in index funds with say Vanguard. I think the answer to this question is NO. I'm sure there are plenty of people (advisors trying to sell you something etc) who will if you have $10M tell you the answer is definitely YES.

But that pesky sentence that you put in "for a given level of risk" should be treated with a great deal of scrutiny.

Lots of people thought the trading behaviors they were engaging in during the lead up to the economic collapse were "low risk"...
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Re: Is investing different for the "rich"?

Postby RadAudit » Thu May 02, 2013 8:45 pm

RenoJay wrote: I ignore calls from wealth advisers (I got cold called today by some guy in Texas pitching oil wells!),


Thanks for the post.

I think it is one of the best advantages of my current portfolio size that I'll never get that phone call.
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Re: Is investing different for the "rich"?

Postby Boonedog » Thu May 02, 2013 8:49 pm

musbane wrote:RenoJay,
I hate to pry, and you're under no obligation to tell us, but I for one would be vastly interested to know what fixed income investments would be significantly superior to bonds.



Yes, that was my immediate thought as well. Do Tell!
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Re: Is investing different for the "rich"?

Postby baw703916 » Thu May 02, 2013 8:55 pm

At least as of a few years ago, DFA funds had a $2 million minimum (with the exception of going through an approved advisor). So above $10 million in portfolio size, it starts to get reasonable to just buy them directly, straight up.
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Re: Is investing different for the "rich"?

Postby RenoJay » Thu May 02, 2013 9:34 pm

Boonedog wrote:
musbane wrote:RenoJay,
I hate to pry, and you're under no obligation to tell us, but I for one would be vastly interested to know what fixed income investments would be significantly superior to bonds.



Yes, that was my immediate thought as well. Do Tell!


Though I get pitches to invest in small companies, or their debt, what I was referring to was private money lending. Technically it's higher-risk/higher headache, but I've found it to be an investing panacea in this low interest rate world. Where I live (Nevada) home prices have crumbled by about 50%. There are many otherwise credit-worthy people who made the decision to strategically walk away from their mortgages. Once they get out from being underwater, they realize that they really want to own a home again, but since they did a short sale they can't get a traditional bank loan for several years. Enter hard money lending. In most cases, the buyers make an offer on a house, only to realize during the escrow process that banks won't touch them. Their Realtor approaches my broker to get a loan. My broker evaluates the deal and brings me ones that meet my criteria. My criteria are that the home must be in the $300k - $500k range, that the borrower put a cash down payment of 35% or higher, and that they pay me interest in the 9.5% - 10% range. I get a first lien on the house. If/when their credit improves, they're free to refi to a traditional mortgage. The reason I feel this is safe is that the house would need to drop another 50% from these lows to wipe out the owner's equity. I think that's highly unlikely since the market is recovering and a drop that big would bring values WAAAAY under the cost to rebuild. So since the borrower has so much skin in the game, and they know I'll foreclose if they stop paying, they have lots of incentive to make payments. So far no one has missed a payment. These deals are available on a smaller scale, but I feel they're riskier for smaller deals. The reason is that a homeowner can easily destroy $20k - $30k of home equity (think water leaks, etc.) but it would be hard to destroy $150k - $200k of equity. Therefore, I think my borrowers have lots of incentive to keep up their homes and protect their massive down payments. Furthermore, this sized home is the sweet spot for my market so if I end up needing to take possession of one, I feel confident I can sell or rent it. Before I got into this I had qualms about the morality of loaning money, but as I met the borrowers face to face, they were all very clearly aware that these rates were above market and they were all very, very pleased to get the loan. (I did interviews with each, and they went out of their way to impress upon me how responsible they were, etc.) I posted a thread about this a year or so ago before I started, and most Bogleheads thought it was a bad idea, but I'm very pleased I got into it.

Words of caution for anyone considering this: I met with the three brokers in my area who do this. One was just a sleaze and had "lender beware" written on his forehead. The other had deals I had no interest in. (Small loans, little background information, far away from me geographically, short time period to make a decision.) The third broker impressed me with how, during the housing downturn, he took a year off and made sure all his clients at least got back their principle, if not their interest. For each deal I've done, he's done extensive due diligence and really helped me understand the risks/rewards for each deal. We sat together with a lawyer who explained what happens if the borrower stops paying, and we reviewed all the paperwork. He explained that the people who haggle to get a 9% rate instead of a 12% are usually better borrowers. He did a lot of hand-holding in the beginning which has made me more confident today. Had I not found this guy (whom I trust) I may not be in this line of investments.
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Re: Is investing different for the "rich"?

Postby musbane » Thu May 02, 2013 9:50 pm

Thank you.

Not my cup of tea, but I appreciate the response.

I think it requires a talant that I don't have. Knowing who to trust....twice.
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Re: Is investing different for the "rich"?

Postby RenoJay » Thu May 02, 2013 10:18 pm

musbane wrote:Thank you.

Not my cup of tea, but I appreciate the response.

I think it requires a talant that I don't have. Knowing who to trust....twice.


Probably a sensible choice for many people. I wouldn't have touched this five or six years ago, but given my views of housing prices in my area, the tightness of traditional lending and the low rates of returns on guaranteed investments, I think it makes sense at this particular point in history for me.
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Re: Is investing different for the "rich"?

Postby larryswedroe » Thu May 02, 2013 10:21 pm

We have many clients with eight figure portfolios, and we invest the same way with them as others, though more of them adapt the Larry type very high tilt portfolio with low beta. And we do no VC, no hedge funds ,etc

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Re: Is investing different for the "rich"?

Postby Duckie » Thu May 02, 2013 10:39 pm

RadAudit wrote:I think it is one of the best advantages of my current portfolio size that I'll never get that phone call.

Not necessarily. Years ago I had about $4K in stock at Merrill Lynch. I was cold-called by some young guy wanting me to invest in something (I can't remember now what it was). ML sold/shared my contact info apparently without providing the account balance.
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Re: Is investing different for the "rich"?

Postby Clever_Username » Thu May 02, 2013 11:50 pm

Surprised this hasn't been mentioned yet: the asset allocations can vary. Some fairly wealthy individuals will have a significantly higher equity exposure than you might otherwise expect for their age; if the stocks take a huge nosedive, well, they've still got plenty. Others are the opposite and have a significant bond exposure, keeping as much of their value preserved, since there's no need to take a risk to get to their desired level of wealth. There are terms for this - increasing or decreasing relative risk tolerance, or something like that.
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Re: Is investing different for the "rich"?

Postby lostInFinance » Fri May 03, 2013 12:52 am

I would think the person with the $10M portfolio would have a lower expected return for a given risk level than the person with the $500k portfolio due to taxes. Maybe, some of the experts can weigh in, but I doubt $10M is enough to be able to invest in Sequoia or its ilk.
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Re: Is investing different for the "rich"?

Postby longview » Fri May 03, 2013 3:30 am

RenoJay wrote:2. I get access to some high-returned fixed income deals that pay much better than any bonds I can find but require investments of around $100k - $200k each so these obviously would not be appropriate for people whose portfolios are sub $1 MM.


Please -- do tell. I'm putting some big numbers in FI right now.
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)
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Re: Is investing different for the "rich"?

Postby longview » Fri May 03, 2013 3:31 am

RenoJay wrote:2. I get access to some high-returned fixed income deals that pay much better than any bonds I can find but require investments of around $100k - $200k each so these obviously would not be appropriate for people whose portfolios are sub $1 MM.


Please -- do tell. I'm putting some big numbers in FI right now.
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)
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Re: Is investing different for the "rich"?

Postby longview » Fri May 03, 2013 3:37 am

RenoJay wrote:Though I get pitches to invest in small companies, or their debt, what I was referring to was private money lending. Technically it's higher-risk/higher headache, but I've found it to be an investing panacea in this low interest rate world. Where I live (Nevada) home prices have crumbled by about 50%. There are many otherwise credit-worthy people who made the decision to strategically walk away from their mortgages. Once they get out from being underwater, they realize that they really want to own a home again, but since they did a short sale they can't get a traditional bank loan for several years. Enter hard money lending. In most cases, the buyers make an offer on a house, only to realize during the escrow process that banks won't touch them. Their Realtor approaches my broker to get a loan. My broker evaluates the deal and brings me ones that meet my criteria. My criteria are that the home must be in the $300k - $500k range, that the borrower put a cash down payment of 35% or higher, and that they pay me interest in the 9.5% - 10% range. I get a first lien on the house. If/when their credit improves, they're free to refi to a traditional mortgage. The reason I feel this is safe is that the house would need to drop another 50% from these lows to wipe out the owner's equity. I think that's highly unlikely since the market is recovering and a drop that big would bring values WAAAAY under the cost to rebuild. So since the borrower has so much skin in the game, and they know I'll foreclose if they stop paying, they have lots of incentive to make payments. So far no one has missed a payment. These deals are available on a smaller scale, but I feel they're riskier for smaller deals. The reason is that a homeowner can easily destroy $20k - $30k of home equity (think water leaks, etc.) but it would be hard to destroy $150k - $200k of equity. Therefore, I think my borrowers have lots of incentive to keep up their homes and protect their massive down payments. Furthermore, this sized home is the sweet spot for my market so if I end up needing to take possession of one, I feel confident I can sell or rent it. Before I got into this I had qualms about the morality of loaning money, but as I met the borrowers face to face, they were all very clearly aware that these rates were above market and they were all very, very pleased to get the loan. (I did interviews with each, and they went out of their way to impress upon me how responsible they were, etc.) I posted a thread about this a year or so ago before I started, and most Bogleheads thought it was a bad idea, but I'm very pleased I got into it.

Words of caution for anyone considering this: I met with the three brokers in my area who do this. One was just a sleaze and had "lender beware" written on his forehead. The other had deals I had no interest in. (Small loans, little background information, far away from me geographically, short time period to make a decision.) The third broker impressed me with how, during the housing downturn, he took a year off and made sure all his clients at least got back their principle, if not their interest. For each deal I've done, he's done extensive due diligence and really helped me understand the risks/rewards for each deal. We sat together with a lawyer who explained what happens if the borrower stops paying, and we reviewed all the paperwork. He explained that the people who haggle to get a 9% rate instead of a 12% are usually better borrowers. He did a lot of hand-holding in the beginning which has made me more confident today. Had I not found this guy (whom I trust) I may not be in this line of investments.


Thats awesome. If you don't mind, what is the Broker's cut?

This reminds me of "holding the paper" when selling your house. If they miss payments you get your house back, not a bad deal.
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)
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Re: Is investing different for the "rich"?

Postby longview » Fri May 03, 2013 3:46 am

I'd say it's the same in principal... from my experience and reading I'd say it "changes" at around 100 million (oh well). Maybe a few changes:

- I have lower equities for my age (but, higher than needed for my risk).
- I've held back ~5% for potential VC or commercial RE opportunities. But that is basically like looking to run a small business on the side, so it's not really just investing.

Around 100 mil is where I think you get the family office, hire some staff, and the goal is all about intergenerational wealth, etc. Roll your own TSM fund for better gains-offsetting, etc.

But at my level it's just 3-fund all the way, with some play money for opportunities.
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)
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Re: Is investing different for the "rich"?

Postby 3504PIR » Fri May 03, 2013 5:25 am

Can they or do they invest differently should be looked at seperately. "Do" they invest differently is an individual decision. "Can" they invest differently is a regulatory decision. People classified as Accredited Investor"s, or people of high net worth and/or income, qualify to invest in what are considered higher risk investments such as hedge funds, limited partnerships, etc.
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Re: Is investing different for the "rich"?

Postby OverTheHill » Fri May 03, 2013 7:43 am

RenoJay wrote:Words of caution for anyone considering this: I met with the three brokers in my area who do this. One was just a sleaze and had "lender beware" written on his forehead. .

I have a very close friend (MD, JD, MBA), who is in his mid-60s. He did a private loan thing with someone he thought to be a very good friend. He lost his entire $500K within about 60 days. Even the US Attorney is investing now. He has no chance of getting his money back. While he's got a lot of money, $500K still caused him a significant amount of pain and feeling foolish.
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Re: Is investing different for the "rich"?

Postby Swampy » Fri May 03, 2013 7:48 am

Is investing different for the "rich"?


I think so, depending on your definition of rich.

I invest differently now than 30 years ago. Back then, when I had much less (and should have risked even less) I wanted to make a killing and took a lot of risks. The only killing I made was killing my own portfolio.

I was in a financial kayak and willing to 'shoot the rapids' to get to my goals earlier.

Now, that I'm in a financial cabin cruiser, I take less risk. What portion I take risk with is significantly smaller, as a percentage of my net worth, than it was 30 years ago.

Those with significant wealth, 8 figures or more, are sailing through life on a luxury yacht. Most take little risk and have enough assets to tide them over in stormy weather. Remember, risking 1% of their portfolio is equivalent (in dollar amounts) to the guy in the kayak risking 100%, or more, of his portfolio.

Then there are those few super-wealthy who have luxury ships, called megayachts. They have a net worth in excess of 9-10 figures. They can do as they wish, sometimes taking great risks at whim because they feel impervious to any losses. I saw Paul Allen's "TATOOSH once. Someone could live on it for the rest of their life and sail the world without care.
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I am grateful to Bogleheads and Vanguard/DFA funds. It has allowed me to invest more like those on a luxury yacht, spreading my risks tremendously. Until last year, I had a money manager who was more interested in his quarterly fees than my financial success. It's amazing how an 'imperceptable' 1% management fee siphons money away and can lead to financial failure.

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Re: Is investing different for the "rich"?

Postby larryswedroe » Fri May 03, 2013 7:55 am

clever username

yes HNW investors have more ability to take risk, and many are overconfident of their skills in investing because they have been successful before (in their business typically)

But the key is to understand that HNW investors have low marginal utility of wealth, thus little/no need to take risk---my line to them is "if you have already won the game, why are you still playing?"

thus when presented with that understanding I've found most will lower their equity allocation
By then tilting the remaining portion of their portfolio to SV stocks while keeping beta small they cut the left tail risks which is their big concern (the strategy to get rich is very different than strategy to stay rich) while allowing them to have a higher expected portfolio return than if using a TSM approach

Best wishes
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Re: Is investing different for the "rich"?

Postby Grt2bOutdoors » Fri May 03, 2013 8:28 am

Yes - bigger pockets from which the barracudas feed from. :twisted:
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Re: Is investing different for the "rich"?

Postby DrDoodle » Fri May 03, 2013 9:54 am

Thanks everyone, this has been interesting reading. I'm going to take a crack at an answer to my own question now, informed by comments above. First, i think I've convinced myself that "rich" investors are still operating on the same risk-return frontier as the rest of us; they don't have access to investments that, for a given risk, provide greater return. (If there were such investments, even if only available to the very rich, their price would get bid up to the point where it matched other investments of similar expected return.) Rich investors apparently have access to a larger world of high-risk/high-return opportunities than do the rest of us, including stuff that is way riskier than what mortals have available. So perhaps it is theoretically possible for them to construct a portfolio that includes more risky (and return-y) investments, and to hedge that risk to some degree, producing a portfolio that, for its level of risk, has higher expected return than is possible using investment vehicles available to mortals. Whether many investors accomplish this is a different story; it's probably the case that many rich investors simply end up with very, very risky investments in search of higher returns.
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Re: Is investing different for the "rich"?

Postby Rick Ferri » Fri May 03, 2013 10:04 am

Many HNW do invest differently, but most shouldn't because they pay higher fees for products that don't perform as well as a simple buy-hold-rebalance index fund strategy.

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Re: Is investing different for the "rich"?

Postby Mill » Fri May 03, 2013 10:07 am

Is investing different for the "rich"?

Something that came to mind and I think this would qualify...

My 401(k) currently allows an investment option for VINIX (Vanguard Institutional Index) and the expense ratio for that fund is .04. Its basically the same as the VG 500 index (VFIAX) only its ER is 1 basis point lower. I assume that only instutions (and large company 401(k) plans have access to this fund as the minimum investment is 5million dollars.) However, if a rich investor wiwanted to buy in to that fund with 5mil, I dont see why he couldnt?

The difference of 1 basis point probably means very little to average and even wealthy investors, but given enough principle the difference could mean many thousands saved.
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Re: Is investing different for the "rich"?

Postby feh » Fri May 03, 2013 10:20 am

Grt2bOutdoors wrote:Yes - bigger pockets from which the barracudas feed from. :twisted:


This was my initial though also. Potential Madoff victims.
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Re: Is investing different for the "rich"?

Postby learning_head » Fri May 03, 2013 10:25 am

larryswedroe wrote:the key is to understand that HNW investors have low marginal utility of wealth, thus little/no need to take risk---my line to them is "if you have already won the game, why are you still playing?"

thus when presented with that understanding I've found most will lower their equity allocation
By then tilting the remaining portion of their portfolio to SV stocks while keeping beta small they cut the left tail risks which is their big concern (the strategy to get rich is very different than strategy to stay rich) while allowing them to have a higher expected portfolio return than if using a TSM approach


Hi Larry, so you have these clients mostly in something like muni funds in taxable accounts (aside from the SV component)? Is the idea that losing approx inflation rate on much of the portfolio is ok for them because they have more than enough and it's better not to risk it even more than that?
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Re: Is investing different for the "rich"?

Postby larryswedroe » Fri May 03, 2013 11:00 am

learninghead

Most HNW have most assets in taxable, so yes, muni ladders tailored to their state and tax situation is typically for large percent of the portfolio 70-80%

Then with equities have very high tilt, as high as you can get. It's basically a risk parity strategy before anyone thought of the term, changing from most risk in beta to spreading it to beta, size, value (about .6 on the size and value for the extreme tilts and about .3 for others) and then more FI, but virtually no default risk and limited term risk (about 5 years average)

As to the inflation risk, that IMO is just a question of "sucking it up" and staying with the prudent strategy of only buying safe FI. Note the inflation risk is limited by the avoidance of long term bonds. Also some add CCF and often include TIPS as well

HY doesn't really protect you from inflation risk (though does shorten duration a bit as explained) and you are trading one risk for a much greater risk of default and high correlation with equities showing up at the wrong time.

Keep in mind that HY addition to portfolio increases tail risk, which IMO is not a good thing, and certainly not what a HNW investor should seek, they should be seeking the opposite given low marginal utility of wealth

Hope that helps
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Re: Is investing different for the "rich"?

Postby Calm Man » Fri May 03, 2013 11:14 am

lostInFinance wrote:I would think the person with the $10M portfolio would have a lower expected return for a given risk level than the person with the $500k portfolio due to taxes. Maybe, some of the experts can weigh in, but I doubt $10M is enough to be able to invest in Sequoia or its ilk.


It's not quite that bad. I am not stating what my asset base is but with a combination in taxable accounts of a state-specific municipal bond fund (mine is NJ) and Total stock market, taxes are as follows:
On the muni bonds: zero
On TSM: taxes only on dividends. NJ 7%. Fed: 15% + Obamacare 3.8% + loss of deductions and examptions, netting out at a fed of about 20% or so.

So on a 50/50 portfolio, which I use, there is a total tax of about 27% on the dividends from TSM only, which is about 2%, so the final net is about 0.5% on TSM and 0.25% on the whole thing. That is quite manageable.
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Re: Is investing different for the "rich"?

Postby Random Musings » Fri May 03, 2013 12:07 pm

larryswedroe wrote:We have many clients with eight figure portfolios, and we invest the same way with them as others, though more of them adapt the Larry type very high tilt portfolio with low beta. And we do no VC, no hedge funds ,etc

Larry


What sways the eight figure portfolio's more towards a higher tilt as your firm relative to the others? Is it a matter of more time with the client due to higher AUM, be it in the aggregate or with specific personnel?

RM
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Re: Is investing different for the "rich"?

Postby gasman » Fri May 03, 2013 12:20 pm

RenoJay wrote:I'm not quite in the eight-figure club, but I can say that having a reasonably sized portfolio has affected my decisions in the following ways:

1. I keep more than my age in fixed income because I don't feel I need to experience as much of the volatility risk of equities as if I were needing to seriously grown my portfolio;

2. I get access to some high-returned fixed income deals that pay much better than any bonds I can find but require investments of around $100k - $200k each so these obviously would not be appropriate for people whose portfolios are sub $1 MM.

Other than that, all else is the same. I firmly believe in the Boglehead philosophy, I ignore calls from wealth advisers (I got cold called today by some guy in Texas pitching oil wells!), I think costs matter greatly and that timing the market or stock picking are fools' errands.



Could you elaborate further on #2?
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Re: Is investing different for the "rich"?

Postby Mel Lindauer » Fri May 03, 2013 1:52 pm

This thread topic doesn't apply to the poster and is non-actionable. This thread is locked.
Best Regards - Mel | | Semper Fi
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Mel Lindauer
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