How to Become A Millionaire - Factor 6 - Portfolios

As mentioned in previous editions of How to Become a Millionaire, the factors identified are based on the research Spectrem conducts with numerous affluent investors on an ongoing basis.  These factors are consistent among large proportions of the wealthy, however, not absolutely true for every household.  Hopefully some of these traits can assist readers in identifying how some of these factors may apply to their own circumstances.

As a quick reminder, the 8 Factors include the following:

1. Education.
2. Hard Work and Average Hours Worked.
3. Business or Professional Practice Ownership
4. Slightly Aggressive Risk Tolerance
5. Use of Professional Advisors
6. Balanced Portfolios that Include Alternatives – the topic for today
7. Investment Real Estate
8. Willingness to Invest in new but well researched ideas and concepts

Today we will discuss the average portfolios of Millionaires and wealthier households.

The first overview of assets is the breakdown between investible assets and total assets for wealthy households.  Households with $1-5 million of net worth generally have about 62% of their assets represented by Investible Assets.  Households with $5-25 million have about 68% of their portfolios represented by investible assets and the $25 plus households have 70% of their total assets represented by investments.

The following conclusions can be made from the charts:

            -The Principal residence should not represent more than 15% of total                              assets.

-Most of these individuals hold Investment Real Estate as a part of their portfolios.

The second set of charts addresses Investible Assets held by the various wealth segments and the proportion of asset types held within those portfolios.  Some interesting items should be pointed out:

-Deposit accounts represent 10-12% of total investible assets.  This percentage is actually higher than before the financial crisis.

-Professionally Managed accounts, the assets that are managed by an advisor of some type…sometimes in a specific product and other times in a brokerage account…represent almost 25% of the portfolios of households with $5-25 million.  These households, however, have a higher median age than the Millionaires and $25 plus households.  These retired individuals may be more comfortable turning over their assets to advisory firms.  Millionaires have about 18% of their assets in a Managed Account, and the wealthiest households, those with $25 Million plus, have the lowest percentages in Managed Accounts at 16%.

-Mutual Funds are used within all of the portfolios, with Millionaires have the highest percentage ownership of mutual funds.

-Wealthy households are not afraid to invest in Stocks and Bonds with the $5 to $25 Million households holding the highest percentage at 30%, and Millionaires owning 24%. 

-While households with $25 Million Plus have a lower percentage of total Stocks and Bonds at 20%, note that their ownership of Alternative Investments is 20%.  For Millionaire and $5-25 Million households, the alternative investments are included in the Other Investments category and therefore do not exceed 5-7% of the total portfolios.

Several conclusions can be drawn from this data.  It is easy to see that many times Alternatives contribute to the wealth of the most affluent households.  While those individuals who are less wealthy are tinkering with these investments, they do not represent a large portion of their overall portfolios.

Investors should look at these charts with the idea of applying ratios to their own portfolios.  Is the value of your principal residence in proportion to your other assets?  What about your ownership of mutual funds versus stocks and bonds?  How much cash do you currently hold?  Do you have the ability to invest in alternatives?  If so, make sure they do not overpower your other holdings.

With these tips in mind, hopefully, investors can begin to reposition the way they think about their own portfolios.