If rich people don't buy funds or ETFs why should you?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

If rich people don't buy funds or ETFs why should you?

Post by Lbill » Mon May 07, 2012 10:56 am

Most interesting, however, are the differences between the affluent, rich and superrich. More than two thirds of respondents worth between $500,000 and $1 million invest in exchange-traded funds. And more than half of them invest in mutual funds.

Yet only 1% of respondents worth $5 million to $10 million invest in mutual funds. And only 17% invest in ETFs. The trend continues higher up the wealth ladder — among those worth $20 million or more, NONE invest in mutual funds and less than one percent invest in ETFs.
How The Rich Invest
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs

livesoft
Posts: 62699
Joined: Thu Mar 01, 2007 8:00 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by livesoft » Mon May 07, 2012 10:59 am

Uh, because I don't own 231 oil & gas producing wells?
Wiki This signature message sponsored by sscritic: Learn to fish.

zotty
Posts: 841
Joined: Tue Sep 15, 2009 5:18 pm
Location: DFW, Texas

Re: If rich people don't buy funds or ETFs why should you?

Post by zotty » Mon May 07, 2012 11:09 am

Of my very small sample, rich people have Bond Ladders and no need for anything else.

I do know one newly rich person who has a mountain of cash in Vanguard Short Term Investment Grade, waiting out interest rates, then will do a bond ladder. He can afford to wait forever since he keeps getting richer.

if you had 15 million, wouldn't you ladder it and call it a day?
Nadie Sabe Nada

User avatar
mhc
Posts: 3758
Joined: Mon Apr 04, 2011 10:18 pm
Location: NoCo

Re: If rich people don't buy funds or ETFs why should you?

Post by mhc » Mon May 07, 2012 11:11 am

That’s not to say that hedge funds and private equity returns are necessarily BETTER than mutual funds and ETFs. With returns for “private money” under pressure, with fees going up, and investments becoming more and more correlated, I would argue that while the rich may have more exlcusive investments, they don’t always get better returns.
The last part of the quote is one reason.

User avatar
tc101
Posts: 3006
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Re: If rich people don't buy funds or ETFs why should you?

Post by tc101 » Mon May 07, 2012 11:15 am

If I had 5 million to invest in stocks, I might buy a basket of 100 stocks representing an index, pay someone to keep track of the returns, and do slightly better than investing in the index itself. I might just buy the 100 largest stocks in the Vanguard Total World Stock ETF, plus small cap value fund and small cap international and do a little better than an all index portfolio.

I guess I could do that anyway, since I get $2 trades at Vanguard, but it seems like more trouble than the potential savings.
. | The most important thing you should know about me is that I am not an expert.

User avatar
tc101
Posts: 3006
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Re: If rich people don't buy funds or ETFs why should you?

Post by tc101 » Mon May 07, 2012 11:17 am

if you had 15 million, wouldn't you ladder it and call it a day?
No. It would be more fun to play with my money.
. | The most important thing you should know about me is that I am not an expert.

User avatar
bertilak
Posts: 6085
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: If rich people don't buy funds or ETFs why should you?

Post by bertilak » Mon May 07, 2012 11:17 am

People worth multi-millions often got that way by owning a business (or two or three). All their money is tied up in that. They take the big risks and apply the big effort to get the big rewards -- and/or their parents did. They're the ones who gave me my paycheck, my defined benefit retirement plan and who started all the businesses I am invested in.

More power to them.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

sschullo
Posts: 2416
Joined: Sun Apr 01, 2007 8:25 am
Location: Rancho Mirage, CA
Contact:

Re: If rich people don't buy funds or ETFs why should you?

Post by sschullo » Mon May 07, 2012 11:39 am

bertilak wrote:People worth multi-millions often got that way by owning a business (or two or three). All their money is tied up in that. They take the big risks and apply the big effort to get the big rewards -- and/or their parents did. They're the ones who gave me my paycheck, my defined benefit retirement plan and who started all the businesses I am invested in.

More power to them.
I agree. Small business doesn't get the credit they deserve for keeping our economy moving forward and employ 80% of all workers.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

ResNullius
Posts: 2091
Joined: Wed Oct 24, 2007 3:22 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by ResNullius » Mon May 07, 2012 11:45 am

I read an article a few weeks ago that suggested that the super rich or those with dynastic wealth invested in precious metals/gems, land, and art, and that was the secret to their long-lasting wealth.

Grt2bOutdoors
Posts: 19156
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: If rich people don't buy funds or ETFs why should you?

Post by Grt2bOutdoors » Mon May 07, 2012 11:49 am

Agree with your take on land, but not land that just lays fallow. They typically purchase land that has significant or potential for significant income generation and use tax law to shield profits.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

User avatar
HardKnocker
Posts: 2063
Joined: Mon Oct 06, 2008 11:55 am
Location: New Jersey USA

Re: If rich people don't buy funds or ETFs why should you?

Post by HardKnocker » Mon May 07, 2012 11:50 am

Wealth rarely lasts to the third generation which might indicate a failure to invest well.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett

User avatar
kwyjibo
Posts: 62
Joined: Tue Jun 21, 2011 1:44 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by kwyjibo » Mon May 07, 2012 12:02 pm

Since the article was published in 2007 I wonder if much has changed. I assume the reason most of these wealthy investors are invested the way they are is because they have a "wealth manager" who does it for them for a hefty fee.
Last edited by kwyjibo on Wed Jun 26, 2013 5:25 pm, edited 1 time in total.

Jack
Posts: 3254
Joined: Tue Feb 27, 2007 2:24 am

Re: If rich people don't buy funds or ETFs why should you?

Post by Jack » Mon May 07, 2012 12:06 pm

sschullo wrote:Small business doesn't get the credit they deserve for keeping our economy moving forward and employ 80% of all workers.
Not even close. If you look at the statistics from the Small Business Administration, small businesses employ about 50% of all private sector workers and provide only 43% of private sector payroll. This also ignores public sector employment which is about 20% of all employees.

Note that small business is defined as any company with less than 500 employees so "small business" isn't really that small. This is an illustration of the "power law" relationship common to many phenomena. Big companies dominate employment and truly small companies -- 20 employees or less -- contribute little to overall employment.

http://www.sba.gov/sites/default/files/sbfaq.pdf

User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: If rich people don't buy funds or ETFs why should you?

Post by Lbill » Mon May 07, 2012 12:13 pm

A related question: How many people ever actually became wealthy owning stocks, and were able to hold onto it (besides Warren Buffett)? Actually, I'd be willing to bet that a lot more became wealthy by owning and managing real assets such as land, real estate, or a business. Actually, Warren Buffett is regarded by many as having made his money from taking a major stake in businesses and participating in their management - he wasn't a passive buy-and-hold guy either. If you got rich not being a retail customer for Wall Street, what are the chances you're going to do that when you've accumulated your wealth? Why settle for the crumbs when you can have the cake?
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs

User avatar
Epsilon Delta
Posts: 7430
Joined: Thu Apr 28, 2011 7:00 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by Epsilon Delta » Mon May 07, 2012 12:34 pm

If rich people don't buy $150,000 houses why should I?

sschullo
Posts: 2416
Joined: Sun Apr 01, 2007 8:25 am
Location: Rancho Mirage, CA
Contact:

Re: If rich people don't buy funds or ETFs why should you?

Post by sschullo » Mon May 07, 2012 12:37 pm

Jack wrote:
sschullo wrote:Small business doesn't get the credit they deserve for keeping our economy moving forward and employ 80% of all workers.
Not even close. If you look at the statistics from the Small Business Administration, small businesses employ about 50% of all private sector workers and provide only 43% of private sector payroll. This also ignores public sector employment which is about 20% of all employees.

Note that small business is defined as any company with less than 500 employees so "small business" isn't really that small. This is an illustration of the "power law" relationship common to many phenomena. Big companies dominate employment and truly small companies -- 20 employees or less -- contribute little to overall employment.

http://www.sba.gov/sites/default/files/sbfaq.pdf
Thanks. Interesting that the country has 26 million businesses of all kinds and only 50% work for small businesses under 500 employees. Back in the day, it used to be 80% and the rest in public employment, but times have changed.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: If rich people don't buy funds or ETFs why should you?

Post by YDNAL » Mon May 07, 2012 12:42 pm

Lbill wrote:
Most interesting, however, are the differences between the affluent, rich and superrich. More than two thirds of respondents worth between $500,000 and $1 million invest in exchange-traded funds. And more than half of them invest in mutual funds.

Yet only 1% of respondents worth $5 million to $10 million invest in mutual funds. And only 17% invest in ETFs. The trend continues higher up the wealth ladder — among those worth $20 million or more, NONE invest in mutual funds and less than one percent invest in ETFs.
How The Rich Invest <-- June 12, 2007, 1:01 PM
Because people with $xxx,xxx in a 401K can't invest in hedge funds, start-ups, and other investments.
The rich prefer to invest directly in start-up companies. More than a third of those worth $20 million or more invest in start-ups, compared to 6% of those worth $1 million to $5 million. They also like to put their money into hedge funds and private equity, wth 76% of those worth $20 million or more investing in hedge funds.
Since people with $20 million or more don't ususally buy $200K houses in the suburbs, does that mean I shouldn't?
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

User avatar
Random Musings
Posts: 5209
Joined: Thu Feb 22, 2007 4:24 pm
Location: Pennsylvania

Re: If rich people don't buy funds or ETFs why should you?

Post by Random Musings » Mon May 07, 2012 12:43 pm

The plus $20MM crowd does invest quite a bit in hedge funds and start-ups, according to the data provided.

Then you wonder why they don't have any money after a few generations. :wink:

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

User avatar
dmcmahon
Posts: 1872
Joined: Fri Mar 21, 2008 10:29 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by dmcmahon » Mon May 07, 2012 1:05 pm

tc101 wrote:If I had 5 million to invest in stocks, I might buy a basket of 100 stocks representing an index, pay someone to keep track of the returns, and do slightly better than investing in the index itself. I might just buy the 100 largest stocks in the Vanguard Total World Stock ETF, plus small cap value fund and small cap international and do a little better than an all index portfolio.

I guess I could do that anyway, since I get $2 trades at Vanguard, but it seems like more trouble than the potential savings.
Even then you'd be hard pressed to get diversified exposure to small caps and many foreign markets.

KyleAAA
Posts: 6719
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: If rich people don't buy funds or ETFs why should you?

Post by KyleAAA » Mon May 07, 2012 1:11 pm

I know a few extremely rich people who invest in mutual funds and/or ETFs. I question WSJ's methodology. Bogle, for one.

fishndoc
Posts: 2327
Joined: Wed Apr 11, 2007 11:50 am

Re: If rich people don't buy funds or ETFs why should you?

Post by fishndoc » Mon May 07, 2012 1:59 pm

The wealthiest person I know (a cousin and neighbor) got that way working 20 hours a day in his small business (building supply), savvy investing in real estate, and starting a small bank that rapidly became a large bank, and starting several other businesses that he eventually sold for a large profit.

I asked him once about the stock market, and his response was he would only invest in a company if he was buying a majority ownership. He didn't want to trust his money to someone else's management ability and decisions. If he couldn't run the business himself or at least hire and fire the managers, he wasn't interested. I suspect a lot of self-made rich feel the same way.
" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle

Leesbro63
Posts: 5460
Joined: Mon Nov 08, 2010 4:36 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by Leesbro63 » Mon May 07, 2012 3:48 pm

My guess is that ETFs are relatively new, and big money is relatively old and already invested in whatever. But as newer wealth becomes older wealth, ETFs will show up more and more often as mainstream investments for the wealthy too.

clevername
Posts: 277
Joined: Sun Jul 10, 2011 7:13 pm
Location: FL

Re: If rich people don't buy funds or ETFs why should you?

Post by clevername » Mon May 07, 2012 4:14 pm

HardKnocker wrote:Wealth rarely lasts to the third generation which might indicate a failure to invest well.
That's interesting. Got a citation? I'd like to read more about that.

ilmartello
Posts: 1075
Joined: Sun Nov 06, 2011 6:59 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by ilmartello » Mon May 07, 2012 4:39 pm

According to the study, the wealthy are much more likely to put their money into hedge funds, private equity and start-up companies — investments that are out of reach to most everyday investors. The rich avoid the types of investments favored by the masses — exchange traded funds



Quote above from the article.

So, rich people are probably likely directly invested in funds, etf's or individual stocks through hedge funds, although hedge funds do other stuff like buy options, futures, cds contracts, timber, etc.

More importantly, studies have shown that hedge funds and private equity perform worse than the market net of fees.

Just to show you, that being rich doesn't necessarily mean you are smart.

Muchtolearn
Posts: 1563
Joined: Sun Dec 25, 2011 10:41 am

Re: If rich people don't buy funds or ETFs why should you?

Post by Muchtolearn » Mon May 07, 2012 5:15 pm

I am fortunate to be quite well off. The very rich often get into hedge funds because they can and think they should. I will just do the index funds and muni funds at Vanguard regardless of the total.

YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: If rich people don't buy funds or ETFs why should you?

Post by YDNAL » Mon May 07, 2012 5:39 pm

.

I was thinking about this and someone specifically came to mind.
But we have to ask ourselves, what's the purpose of the stock market? It's supposed to be a source of capital for growing business. It's lost that purpose.
The number-one job of the hedge-fund manager is not to make sure that you can retire with a smile on your face - it's for him to retire with a smile on his face.
Quotes by Mark Cuban - worth $2.3 billion in Forbes 400, 09/21/2011
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

SGM
Posts: 2723
Joined: Wed Mar 23, 2011 4:46 am

Re: If rich people don't buy funds or ETFs why should you?

Post by SGM » Mon May 07, 2012 6:33 pm

An ER of .02% is 20,000 for a $10mm portfolio. In fifty years of investing that is $1 mm for ER fees only. It seems like a lot of expense. On the other hand I think a lot of wealthy folks get hand holding and pay higher fees than that. You could make multiple purchases of a broad spectrum of stocks periodically that might run into a few hundred dollars of brokerage fees per year. How much is diversity worth? Is it worth the extra expense of say 800k over 50 years for a $10mm portfolio? Being skeptical of all investment doctrines, I would entertain that question.

....or you could respond with a statement like buy and hold and stay the course as if it were axiomatic. Such statements are not arguements, they are meant to end the arguement.
"Let us endeavor, so to live, that when we die, even the undertaker will be sorry." Mark Twain

ilmartello
Posts: 1075
Joined: Sun Nov 06, 2011 6:59 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by ilmartello » Mon May 07, 2012 6:40 pm

Here is an article on hedge funds based on a study by JPMorgan.

http://www.economist.com/node/21542452
here is no doubt that hedge-fund managers have been good at making money for themselves. Many of America’s recently minted billionaires grew rich from hedge clippings. But as a new book* by Simon Lack, who spent many years studying hedge funds at JPMorgan, points out, it is hard to think of any clients that have become rich by investing in hedge funds (whereas Warren Buffett has made millionaires of many of his original investors). Indeed, since 1998, the effective return to hedge-fund clients has only been 2.1% a year, half the return they could have achieved by investing in boring old Treasury bills.

How can that be, when traditional performance measures for the industry show average returns of 7% or so? The problem is a familiar one in fund management and is the equivalent of the “winner’s curse” that occurs with auctions (the successful bidder is doomed to overpay). Take a whole bunch of fund managers and give them an equal amount of money to invest. The managers that perform best initially will tend to attract more investors, and so will gradually become bigger than the moderate or poor performers (who will eventually go out of business).

But the manager will not perform well indefinitely. By the time a bad year occurs, the manager will be running a much larger fund. In cash terms, the loss on the expanded fund may easily outweigh the gains made when the fund was smaller. The return of the average investor will be lower than the average return of the fund.
I think many people of high net worth like hedge funds for the same reason they like Tiffany's or other high-end stores. Because there is an air of exclusivity to them.
Does not mean they are a better investment.

If you think about , all the additional vehicles that hedge funds invest in that plain mutual funds can't invest in are all zero-sum games. Think options,future contracts, cds, contracts, etc.

SP-diceman
Posts: 3968
Joined: Sun Oct 05, 2008 9:17 am

Re: If rich people don't buy funds or ETFs why should you?

Post by SP-diceman » Mon May 07, 2012 6:52 pm

A guy who makes $50k a year needs to take risks to generate a retirement.
If you have 12 million you’re already there and don’t need the risks.


Simple answer: Im not rich. :)

User avatar
HardKnocker
Posts: 2063
Joined: Mon Oct 06, 2008 11:55 am
Location: New Jersey USA

Re: If rich people don't buy funds or ETFs why should you?

Post by HardKnocker » Mon May 07, 2012 7:12 pm

clevername wrote:
HardKnocker wrote:Wealth rarely lasts to the third generation which might indicate a failure to invest well.
That's interesting. Got a citation? I'd like to read more about that.
Heck no, I just made it up. :wink:
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett

User avatar
bertie wooster
Posts: 764
Joined: Mon Jun 25, 2007 5:14 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by bertie wooster » Mon May 07, 2012 7:32 pm

SGM wrote:An ER of .02% is 20,000 for a $10mm portfolio. In fifty years of investing that is $1 mm for ER fees only. It seems like a lot of expense. On the other hand I think a lot of wealthy folks get hand holding and pay higher fees than that. You could make multiple purchases of a broad spectrum of stocks periodically that might run into a few hundred dollars of brokerage fees per year. How much is diversity worth? Is it worth the extra expense of say 800k over 50 years for a $10mm portfolio? Being skeptical of all investment doctrines, I would entertain that question.
I don't think the overall cost over 50 years is that relevant, but the $20k/year is. This rich person won't be able to hire someone to personally manage his money for that much and if he/she goes to an investment firm or invests in hedge funds or whatever the annual cost will be far greater.

If they choose to personally mange the investments as you suggest then they could have much less in expenses, but that requires a desire to do so as well as some amount of talent. If I were in that position I'd just stick w/ the same portfolio I have now (which is just a handful of index funds) b/c I don't now (and wouldn't in the future) want to manage a portfolio of individual stocks.

Sadly, this is an academic discussion b/c I'll never have $10 mil to invest.

psteinx
Posts: 2891
Joined: Tue Mar 13, 2007 2:24 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by psteinx » Mon May 07, 2012 8:03 pm

.02% of $10,000,000 is $2,000, not $20,000.

richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Re: If rich people don't buy funds or ETFs why should you?

Post by richard » Mon May 07, 2012 8:05 pm

KyleAAA wrote:I know a few extremely rich people who invest in mutual funds and/or ETFs. I question WSJ's methodology. Bogle, for one.
Yep.

It's not even the WSJ's methodology, it's some financial advisory firm that may have some motivation for reporting such results.

Muchtolearn
Posts: 1563
Joined: Sun Dec 25, 2011 10:41 am

Re: If rich people don't buy funds or ETFs why should you?

Post by Muchtolearn » Mon May 07, 2012 8:23 pm

SGM wrote:An ER of .02% is 20,000 for a $10mm portfolio. In fifty years of investing that is $1 mm for ER fees only. It seems like a lot of expense. On the other hand I think a lot of wealthy folks get hand holding and pay higher fees than that. You could make multiple purchases of a broad spectrum of stocks periodically that might run into a few hundred dollars of brokerage fees per year. How much is diversity worth? Is it worth the extra expense of say 800k over 50 years for a $10mm portfolio? Being skeptical of all investment doctrines, I would entertain that question.

....or you could respond with a statement like buy and hold and stay the course as if it were axiomatic. Such statements are not arguements, they are meant to end the arguement.
That's $2000 not $20,000 for an ER of 0.02% on 10 million. I am not aware of such ERs. At Vanguard, using Admiral shares, if one uses total stock market, total bond market, muni funds and total international, one can average an ER of about 0.1%. ON 10 MM, that is $10K a year. I know a bunch of folks who pay a straight 1% (usually that's all in as it is individual stocks and bonds) plus ETF or MR fees added on.l At 1%, that 100K a year. They don't think about it until pointed out. Then they get sort of sick but prefer the advisor so they stay with it. I would get sufficiently sick at 100K a year that my will would go to probate quickly.

dorokhin
Posts: 294
Joined: Sun Jul 27, 2008 3:26 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by dorokhin » Mon May 07, 2012 8:52 pm

richard wrote:
KyleAAA wrote:I know a few extremely rich people who invest in mutual funds and/or ETFs. I question WSJ's methodology. Bogle, for one.
Yep.

It's not even the WSJ's methodology, it's some financial advisory firm that may have some motivation for reporting such results.
I can confirm that this article is basically completely made up. My source? Working with UHNW clients, of which close to 100% have at least some of their money in at least one ETF.

User avatar
Tortoise
Posts: 367
Joined: Sat Aug 08, 2009 3:24 am
Location: San Jose

Re: If rich people don't buy funds or ETFs why should you?

Post by Tortoise » Mon May 07, 2012 9:12 pm

HardKnocker wrote:
clevername wrote:
HardKnocker wrote:Wealth rarely lasts to the third generation which might indicate a failure to invest well.
That's interesting. Got a citation? I'd like to read more about that.
Heck no, I just made it up. :wink:
Funny, but I thought I had heard something to that effect, and a Google search came up with this oldie from 1849. Don't know that I agree with it, but...

http://books.google.com/books?id=4QgqAA ... on&f=false

"Beating the Midas Curse" is a book from 2005 describing the 3rd generation phenomenon with anecdotal evidence.

http://www.amazon.com/Beating-Midas-Cur ... 1933694009
"Always do right. This will gratify some people, and astonish the rest." --Mark Twain

sport
Posts: 7255
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: If rich people don't buy funds or ETFs why should you?

Post by sport » Mon May 07, 2012 10:00 pm

For what it's worth, I recently received an Annual Funding Notice for a corporate pension plan which pays me a pension. The value of the plan is $171,000,000. The plan is invested 99.5% in "registered investment companies (e.g. mutual funds)". So, in this instance, at least, there are professional managers who think that mutual funds are just fine for a very large portfolio.

Jeff

User avatar
wshang
Posts: 1053
Joined: Sun Feb 03, 2008 11:40 am

Re: If rich people don't buy funds or ETFs why should you?

Post by wshang » Mon May 07, 2012 10:13 pm

My son works for a private equity firm. The UHNW individual profiting off this money pool takes nearly zero risk in making a profit off these arbitrages. I don't understand why there continues to be the belief that the rich got rich by investing in a stupid manner . . . EMH is true for all players, etc.
“. . . extraordinary wealth can be made by knowing the future" - Harry Dent

User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: If rich people don't buy funds or ETFs why should you?

Post by Lbill » Mon May 07, 2012 10:31 pm

I'm a very rich man and I'm offered an opportunity to invest in something that might pay off, but it seems that every so often it might unpredictably lose 50% or more and there have been periods as long as 20 years when this investment lost money or didn't make any at all. I think I'd look for a better offer. Since I'm actually not a rich man, I guess this is the best deal I can get. :oops:
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs

Leesbro63
Posts: 5460
Joined: Mon Nov 08, 2010 4:36 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by Leesbro63 » Mon May 07, 2012 10:31 pm

wshang wrote:My son works for a private equity firm. The UHNW individual profiting off this money pool takes nearly zero risk in making a profit off these arbitrages. I don't understand why there continues to be the belief that the rich got rich by investing in a stupid manner . . . EMH is true for all players, etc.
Huh? Can you elaborate?

User avatar
wshang
Posts: 1053
Joined: Sun Feb 03, 2008 11:40 am

Re: If rich people don't buy funds or ETFs why should you?

Post by wshang » Mon May 07, 2012 10:35 pm

Leesbro63 wrote:
wshang wrote:My son works for a private equity firm. The UHNW individual profiting off this money pool takes nearly zero risk in making a profit off these arbitrages. I don't understand why there continues to be the belief that the rich got rich by investing in a stupid manner . . . EMH is true for all players, etc.
Huh? Can you elaborate?
It's called flash trading and arbitraging small price differences between near identical equities. They are in cash 99.9% of the time and never when the market is closed. The UHNW can do things with money we can not even imagine.
“. . . extraordinary wealth can be made by knowing the future" - Harry Dent

Tuxx
Posts: 863
Joined: Tue Mar 30, 2010 1:19 am

Re: If rich people don't buy funds or ETFs why should you?

Post by Tuxx » Mon May 07, 2012 10:44 pm

But central banks are buying ETFs.

Bank of Japan buys record amount of stock ETFs
http://www.marketwatch.com/story/bank-o ... 2012-05-07

The Bank of Japan stepped back into the stock market Monday, making its largest single-day purchase of exchange-traded funds to date, though the move failed to prevent a sharp fall for the Tokyo equity market.

$500B of freshly printed debt, does not go as far as it use to.

Leesbro63
Posts: 5460
Joined: Mon Nov 08, 2010 4:36 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by Leesbro63 » Mon May 07, 2012 10:53 pm

wshang wrote:
Leesbro63 wrote:
wshang wrote:My son works for a private equity firm. The UHNW individual profiting off this money pool takes nearly zero risk in making a profit off these arbitrages. I don't understand why there continues to be the belief that the rich got rich by investing in a stupid manner . . . EMH is true for all players, etc.
Huh? Can you elaborate?
It's called flash trading and arbitraging small price differences between near identical equities. They are in cash 99.9% of the time and never when the market is closed. The UHNW can do things with money we can not even imagine.
Just ask Jon Corzine

xerty24
Posts: 4827
Joined: Tue May 15, 2007 3:43 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by xerty24 » Tue May 08, 2012 2:17 am

A big part of this is the SEC trying to protect the middle class from themselves and not coincidentally save the SEC a bunch of enforcement work. With all the accredited investor and qualified purchaser standards starting at $1M and $5M respectively (and to be raised soon), practically speaking you need to hit the $10M point just to be allowed to invest in hedge funds or private equity.

In short, the moderately rich have no choice but to use ETFs and MFs, while the really rich can and do avail themselves of their additional investment options. I know people like to berate the returns of these categories, but comments like wshang's should suggest the conventional wisdom may be missing the mark too.
No excuses, no regrets.

SGM
Posts: 2723
Joined: Wed Mar 23, 2011 4:46 am

Re: If rich people don't buy funds or ETFs why should you?

Post by SGM » Tue May 08, 2012 4:16 am

Muchtolearn wrote:
SGM wrote:An ER of .02% is 20,000 for a $10mm portfolio. In fifty years of investing that is $1 mm for ER fees only. It seems like a lot of expense. On the other hand I think a lot of wealthy folks get hand holding and pay higher fees than that. You could make multiple purchases of a broad spectrum of stocks periodically that might run into a few hundred dollars of brokerage fees per year. How much is diversity worth? Is it worth the extra expense of say 800k over 50 years for a $10mm portfolio? Being skeptical of all investment doctrines, I would entertain that question.

....or you could respond with a statement like buy and hold and stay the course as if it were axiomatic. Such statements are not arguements, they are meant to end the arguement.
That's $2000 not $20,000 for an ER of 0.02% on 10 million. I am not aware of such ERs. At Vanguard, using Admiral shares, if one uses total stock market, total bond market, muni funds and total international, one can average an ER of about 0.1%. ON 10 MM, that is $10K a year. I know a bunch of folks who pay a straight 1% (usually that's all in as it is individual stocks and bonds) plus ETF or MR fees added on.l At 1%, that 100K a year. They don't think about it until pointed out. Then they get sort of sick but prefer the advisor so they stay with it. I would get sufficiently sick at 100K a year that my will would go to probate quickly.
Sorry I meant 0.2%. :oops: The lowest ER for Vanguard funds I believe is .05% for the S&P 500 Admiral shares. A mostly buy and hold of individual stocks mixed with some funds can get your yearly expenses much lower. I suspect one could have expenses about 1/4 or less of Vanguards 0.1% average for the portfolio you propose . In order to do this you would have to be self directed and not trade very often.

If you pay an advisor you usually get a discount above various threshold say $1mm and up. The fees are quite a bit above what a BH would sanction. I think it is dotty to pay these high fees.

I tend to think of fees in relationship to what a portfolio can generate in retirement income or generate in dividends. If a sustainable withdrawal rate for each million is 40k per year then the a fee of 1k is low but not negligble. If you generate 2% in dividends and interest than a fee of 1k out of 20k seems terribly high.
"Let us endeavor, so to live, that when we die, even the undertaker will be sorry." Mark Twain

ilmartello
Posts: 1075
Joined: Sun Nov 06, 2011 6:59 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by ilmartello » Tue May 08, 2012 4:57 am

wshang wrote:
Leesbro63 wrote:
wshang wrote:My son works for a private equity firm. The UHNW individual profiting off this money pool takes nearly zero risk in making a profit off these arbitrages. I don't understand why there continues to be the belief that the rich got rich by investing in a stupid manner . . . EMH is true for all players, etc.
Huh? Can you elaborate?
It's called flash trading and arbitraging small price differences between near identical equities. They are in cash 99.9% of the time and never when the market is closed. The UHNW can do things with money we can not even imagine.

This is no free lunch. Ask long-term capital management, the analogy was picking up pennies in front of a steamroller.

xerty24
Posts: 4827
Joined: Tue May 15, 2007 3:43 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by xerty24 » Tue May 08, 2012 5:00 am

ilmartello wrote:
It's called flash trading and arbitraging small price differences between near identical equities. They are in cash 99.9% of the time and never when the market is closed. The UHNW can do things with money we can not even imagine.
This is no free lunch. Ask long-term capital management, the analogy was picking up pennies in front of a steamroller.
With all due respect, you don't know what you're talking about here. This is nothing like LTCM. There is a little risk, but compared to anything people invest in around here, it might as well be zero.
No excuses, no regrets.

ilmartello
Posts: 1075
Joined: Sun Nov 06, 2011 6:59 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by ilmartello » Tue May 08, 2012 5:23 am

xerty24 wrote:
ilmartello wrote:
It's called flash trading and arbitraging small price differences between near identical equities. They are in cash 99.9% of the time and never when the market is closed. The UHNW can do things with money we can not even imagine.
This is no free lunch. Ask long-term capital management, the analogy was picking up pennies in front of a steamroller.
With all due respect, you don't know what you're talking about here. This is nothing like LTCM. There is a little risk, but compared to anything people invest in around here, it might as well be zero.
The company used complex mathematical models to take advantage of fixed income arbitrage deals (termed convergence trades) usually with U.S., Japanese, and European government bonds. Government bonds are a "fixed-term debt obligation", meaning that they will pay a fixed amount at a specified time in the future.[12] Differences in the bonds' present value are minimal, so according to economic theory any difference in price will be eliminated by arbitrage. Unlike differences in share prices of two companies, which could reflect different underlying fundamentals, price differences between a 30 year treasury bond and a 29 and three quarter year old treasury bond should be minimal—both will see a fixed payment roughly 30 years in the future. However, small discrepancies arose between the two bonds because of a difference in liquidity.[13] By a series of financial transactions, essentially amounting to buying the cheaper 'off-the-run' bond (the 29 and three quarter year old bond) and shorting the more expensive, but more liquid, 'on-the-run' bond (the 30 year bond just issued by the Treasury), it would be possible to make a profit as the difference in the value of the bonds narrowed when a new bond was issued. LTCM also attempted creating a splinter fund in 1996 called LTCM-X that would invest in even higher risk trades and also focus on Latin American markets. LTCM turned to UBS bank to invest in and write the warrant for this new spin-off company.[14]

Because these differences in value were minute—especially for the convergence trades—the fund needed to take highly-leveraged positions to make a significant profit. At the beginning of 1998, the firm had equity of $4.72 billion and had borrowed over $124.5 billion with assets of around $129 billion, for a debt to equity ratio of over 25 to 1.[16] It had off-balance sheet derivative positions with a notional value of approximately $1.25 trillion, most of which were in interest rate derivatives such as interest rate swaps. The fund also invested in other derivatives such as equity options.
In 1998, the chairman of Union Bank of Switzerland resigned as a result of a $780 million loss due to problems at Long-Term Capital Management.[2]

http://en.wikipedia.org/wiki/LTCM#Trading_strategies

Would you like me to tell you how it ended

xerty24
Posts: 4827
Joined: Tue May 15, 2007 3:43 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by xerty24 » Tue May 08, 2012 5:29 am

I know all about LTCM and I'm telling you there's no comparison. There's a huge difference in risk between holding a convergence bet for seconds and for months.
No excuses, no regrets.

ilmartello
Posts: 1075
Joined: Sun Nov 06, 2011 6:59 pm

Re: If rich people don't buy funds or ETFs why should you?

Post by ilmartello » Tue May 08, 2012 5:35 am

The only way you can make decent money on arbitrage is leverage!

Post Reply