People who have a lot of money favor stocks. That may seem logical. The rich can afford to take risks. But they can also afford not to—and in a painfully slow economy where stocks have returned next to nothing for a dozen years you might think they’d rather play it safe and protect what they have.
Yet individual domestic stocks are the No. 1 place that millionaires have been putting their money in the past year, according to a Fidelity survey. This runs directly counter to the behavior of the average investor, who has been steadily lightening up on stocks in favor of bonds since the financial crisis.
Nobody says the millionaires have it right. Bonds have been a better investment the past few years. But folks with money seem to be placing their bets on an eventual recovery where stocks again rise faster than any other asset class, as they have for much of the last 100 years. Indeed, in the survey millionaires expressed the highest level of confidence in the stock market’s future returns since Fidelity started the survey in 2006.
The millionaire set isn’t what you might imagine. For starters, the average millionaire in the survey has assets of around $3 million—comfortable, for sure, but in today’s low interest rate environment far from able to live like royalty. Meanwhile, 86% of millionaires describe themselves as self-made; they got there in large part through jobs that include profit sharing and stock options. That may help explain their affinity for stocks.
The other 14% inherited family money. Those born to millions are decidedly more conservative in their portfolios and rely far more on a financial adviser. They own fewer stocks and more real estate. Yet both groups feel equally financially secure.
A lot of millionaires are mainly focused on wealth preservation—30% of those in the survey, while just 20% are focused mainly on generating more wealth. The survey strongly suggests that those focused on generating more wealth come from the self-made camp, which is heavier into stocks. By the way, they aren’t necessarily among the youngest millionaires. Six in 10 of those focused on generating more wealth are boomers, or older.
What does all this mean for you? Millionaires often set the trend in financial markets. To the extent they are favoring stocks over things like bank CDs and bonds, it might signal that’s where the best returns will be in coming years. The average investor’s persistent exodus from stocks could backfire in the long run. Consider ramping up your exposure to stocks and being patient. A good percentage benchmark is 110 minus your age. So, at 60 you should have 50% of your portfolio in stocks.
Somewhat ironically, it’s the average investor who can least afford to avoid risk. Millionaires already have financial security. They can sit on their hands, even though most aren’t.