Does the 1% invest differently than the vast majority of us? Do
they invest smarter? What, if anything, can the 99% do to narrow
Here's the good news:Investment advice, strategies andasset
classes that were once the sole province of the moneyed elite are
now broadly available to five-figure portfolios as much as they are
to eight-figure ones.
1. Online access to high-quality investment advice
During the past couple of decades, most industries have been
disrupted by technology and are now being powered by online
services. For example, the travel industry once was served by
travel agents, who are now few and far between as individuals
research and book their vacations online. Traditional
brick-and-mortar book retailers such as Borders have given way to
Amazon (Nasdaq: AMZN)
Netflix (Nasdaq: NFLX)
turned the at-home entertainment industry on its head, trouncing
once-dominant Blockbuster. And, of course, let's not forget how
iTunes has transformed the music industry. The list goes on.
The disruption has finally arrived for the investing industry as
well. In-depth, high-caliber investment advice provided by
traditionalwealth management firms was once available only to the
wealthiest segment of investors. Now, with access to technology
that provides real-time data and analytics personalized to the
investor's needs, new tools and services give all investors access
to high-quality investment guidance, no matter if they have a
portfolio of $50,000 or $5 million.
2. The end of the tyranny of the high account minimum fund
Two words could sum up the longstanding advantage enjoyed by those
among us with very highnet worth : "account minimum." This refers
to the minimum amount of funds an investor has to have in order to
invest in a certain fund or other vehicle, and that amount can
range from $100,000 or so for a separately managed account (
) to several million dollars or more for entree to an elitehedge
Those account minimums put them off-limits to all but the
wealthiest sliver of oureconomy . Even for a family that has, say,
$200,000 to invest, a $100,000 account minimum is a non-starter
because it wouldmean that 50% of the total asset base would be
invested in one exposure -- not a prudentdiversification
It's simply a fact that many fund managers need to (or claim to
need to) maintain the high account minimums in order to operate
profitably. However, the fact that a $20,000 portfolio can't gain
access to the high minimum SMA or hedge funds does not mean that
these strategies are off-limits to the 99%.
An increasing trend in recent years among separate account
managers has been to launchmutual fund versions of their SMA
strategies. These mutual funds employ the same thought process, and
their holdings reflect the same asset selection choices that are
invested in the separate accounts -- but they are available to
retail investors in the same way as any mutual fund.
The same may not be true for hedge funds -- hedge fund managers
typically don't operate mutual fund versions of their strategies,
as that would require a level of disclosure and transparency they
are not willing to countenance. However, we are increasingly seeing
the emergence of traditionalhedge strategies -- approaches like
market-neutral, directional long-short, distressed assets
orfixed-income arbitrage -- appearing in mutual fund form. Veteran
hedge fund managerswill sniff that these SEC-registered vehicles
can't possibly replicate the brilliance and nimbleness of their
strategies. But given the generally poor performance of many hedge
funds in the last five years or so, those dismissive comments may
not worth paying attention to.
3. The emergence of theETF
Exchange traded funds (
) are truly a revolutionizing innovation that has changed the face
of thecapital markets in the 15 or so years that they have been a
fixture on the scene.
ETFs provide direct exposure to targeted asset classes by
replicating the performance of benchmarks in those classes. This
means that a portfolio of nearly any size can obtain surgical
exposure to a wide range of asset classes, encompassing equities,
fixed income andalternative asset classes such as commodities,
REITs and -- yes -- even those same hedge strategies mentioned
Most good investment advisors will tell you that the most
important thing you can do to improve your chance of long-term
investment success is to maintain a disciplined diversification
among assets that exhibit low levels of correlation with each
other. Moreover, with ETFs, you can hold a core component of
high-quality assets that likely will change little over many years
while retaining a peripheral, or satellite, allocation (say around
20% of total assets) that can move in and out of opportunities on a
more tactical basis.
Say you want to take advantage of a possible boom in emerging
Asian equities or the price of crude oil. There are ETFs available
that give you these precise exposures. That kind of flexibility
would have been hard to achieve for portfolios of less than
$100,000 in pre-ETF days.
Action to Take -->
The good news is that with mutual funds -- and increasingly more so
with ETFs -- ordinary investors like you and me have access to a
wide range of many once-remote investment strategies and vehicles.
But with the number of funds on the increase, the downside is the
complexity involved in selecting the right funds to make up an
efficient portfolio that is well-suited to your goals. And so it's
back to the software revolution I referred to earlier.
Just as Amazon or Netflix are harnessing the ability to
intelligently make personalized recommendations, so too is a
nascent online investment software industry beginning to emerge
that offers personalized investment guidance.
The availability of low cost funds -- together with high-quality
investment advice that is accessible online -- perhaps puts
ordinary investors in the strongest position they have ever been to
make intelligent investment decisions.
This article originally appeared on InvestingAnswers.com:
Invest Like The Top
1% Thanks To These 3 Revolutionary Changes
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