When it comes to investing for the future, there appears to be an interesting dichotomy. The typical financial advice marketed to the middle class — upper and lower — calls for long-term growth through investing in the stock market. The typical sales pitch — and I use “sales pitch” as a general term, not necessarily something you hear from a salesperson, but often you do — mentions or implies an almost guaranteed return of 8%, sometimes 10% or 12%, over any thirty-year period. For many people, the stock market is their only hope for collecting enough wealth for retirement.
For the most part, wealthy people have a different approach to building for the future. Owning companies and investing directly in businesses, when successful, are much more successful than investing in the stock market. Don’t forget that a lot of investors of this type fail or go bankrupt. Occasionally they continue trying until they become one of the success stories, but often, survivorship bias dooms them to oblivion forevermore. For those who succeed, once that wealth has been built, goals turn towards eventual retirement and the cessation of the hard work of diligent company-acquiring or fervent CEO-ship. It’s not the stock market for these folks, however.
One of my favorite examples is Suze Orman. She is one of the most popular television personalities, and she doles out financial advice on television, on radio, and in her books. She, like most other financial advisers and planners, looks towards the stock market for long-term growth — for those who have the stomach to sit through short-term volatility. Peek inside her own portfolio, and you might find a different story. Suze prefers investing the bulk of her wealth in super-safe municipal bonds, triple-A rated, rather than stocks. The information on Suze’s portfolio is now a few years old, and it’s quite possible she may have shifted her asset allocations and changed her diversification, but the information is relevant. In 2007, just 4% of Suze’s non-real estate portfolio was invested in stocks — at a time she was recommending an allocation of mostly stocks to callers her same age.
Of course, age isn’t the only consideration. 4% of Suze’s portfolio in 2007 amounted to $1 million, and that amounts to larger exposure to the stock market than most middle class workers. Though I’m sure she wouldn’t like to lose $1 million, she could certainly afford to. She can take this small amount of risk. She doesn’t need to build up towards retirement; Suze could retire today and live off bond income for the rest of her life.
In light of the volatility in the stock market following the earthquakes and tsunami in Japan, analysts are saying the stock market is now too risky for investors. The risk doesn’t change depending on market condition, however. The risk has always been there. There is some kind of association in the bran that makes people think that when stocks are going up, stocks are the best methods of building wealth, while when stock markets are volatile, they are bad. The equity market doesn’t change characterization overnight. The same rules apply — there is always risk in the stock market. Those who can afford to take the risk do so appropriately. Others who believe the stock market is their only hope for a comfortable retirement invest because, thanks to the financial planning industry, they believe they must. Those who don’t want to take this type of risk run companies and acquire businesses. There is risk in that, as well, and in fact those who do are often more exposed, but most have determined that bouncing back is possible and are willing to put the work in the promise for greater returns than the stock market and, perhaps more importantly, never being required to put the bulk of their money at risk again.
Do you believe that owning companies and investing in businesses is a better way to prepare for retirement than investing in the stock market, even index mutual funds? Is the stock market just too risky today?
Updated March 24, 2011 and originally published March 22, 2011.