Robin Powell
By Robin Powell on March 07, 2023

Should rich people invest in the same funds as everyone else?

Of course, people understandably take issue with Beckham for some of the things he has done, including his enthusiastic promotion of the Qatar World Cup for one. But the willingness of a multi-millionaire superstar to queue for hours with everyone else to pay his respects rightly won him plaudits.

The point, of course, is that someone of Beckham’s wealth and influence could surely have gone to the front, as other celebrities did. When you’ve become so fabulously rich and famous, you could perhaps be forgiven a certain sense of entitlement.

But trying to jump the queue isn’t always a good idea, and the world of investing provides a good example.

Portfolio size makes no difference

I’m sometimes contacted by very wealthy people who’ve read my blog, asking to be put in touch with an adviser who can help them. My response is always the same: I’m happy to do so, but the size of their investable assets doesn’t make the slightest difference to whom I recommend. I only refer readers to firms that advocate long-term investing, global diversification and passively managed funds.

That’s right: the most suitable investment products for the rich are exactly the same as those for the man or women on the street. To quote the legendary investor Warren Buffett, “both large and small investors should stick with low-cost index funds.”

Buffett wrote those words in his 2016 letter to Berkshire Hathaway shareholders. That letter, I suggest, is essential reading for high-net-worth and ultra-high-net-worth investors.

A lesson in human behaviour

“Over the years,” Buffett writes, “I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behaviour.”

“My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.”

“I believe, however, that none of the mega-rich individuals… has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager.”

How, then, does Warren Buffett explain the reluctance of very rich people to follow his advice?

“The wealthy,” he writes, “are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive.”

“In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial ‘elites’ have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars.”

Effort and intelligence make little difference

Though I broadly agree with the point that Buffett is making, I personally think he’s being a little harsh. I have another suggestion as to why the very wealthy often overlook index funds in favour of more “sophisticated” investments like hedge funds, private equity or venture capital. The rich have often earned their wealth, as Beckham did, by working very hard and being exceptionally good at what they do. They assume, therefore, that if only they can find someone as good as they are in the field of investing, they can make their money grow even faster.

The problem, of course, as we’ve explained on this blog many times, is that investing doesn’t work like that. How smart your investment manager is, or how hard they work, is more or less irrelevant. Consistently beating the market, in the long run, is extremely hard to do. You really are better off capturing the market return as cheaply and efficiently as possible.

Of course, it’s perfectly possible that you could find, say, a hedge fund manager who goes on to become a star investor. Or you could identify, in advance, the next Apple or Google. But the odds are heavily stacked against you.

Remember as well that trying to outperform through active management comes at a significant cost. “My calculation,” Buffett wrote in that 2016 letter, “is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade.”

Familiarise yourself with basic academic finance

My own advice for very wealthy investors is to invest some time in reading academic finance. You don’t need to go into it in huge detail; just familiarise yourself with the most important findings. What does the peer-reviewed evidence tell us about the challenge of timing the stock market? Or the chances of identifying outperforming fund managers ahead of time? What does it say about the importance of diversification? Or the need to stay disciplined and tune out market noise?

Once you’ve done that, choose a financial adviser with an evidence-based investment philosophy. And yes, that means one adviser to look after all of your investable wealth. Having multiple advisers managing your money only results in what we call “false diversification”; you’ll end up largely owning the same securities through different investment houses, which is far more costly, and riskier, than a centralised approach.

OK, so you might not impress your wealthy friends by getting in line with the hoi polloi to invest in low-cost index funds. But let them laugh: the joke’s on them.

This article is produced by us for Financial Advisers who may choose to share it with their clients. Timeline Planning and Timeline Portfolios do not offer direct-to-consumer products

Robin Powell is a journalist, author and editor of The Evidence-Based Investor.


Published by Robin Powell March 7, 2023
Robin Powell