How did theForbes 400get to be fabulously wealthy?
That’s what every investor wants to know, so Merrill Lynch CIO Ashvin B. Chhabra studied the members of the list to see what they had in common.
In his book, “The Aspirational Investor: Taming the Markets to Achieve Your Life’s Goals,” he breaks down the world’s billionaires into four categories: business owners, money managers, real estate magnates, and those who inherited money.
He discovered that no matter what category they fell into, the richest Americans had one common trait: ignoring the conventional wisdom about investing.
They didn’t grow their wealth by investing in portfolios based on the idea of asset allocation and diversification, as financial advisers traditionally suggest. Instead, they did the opposite.
All four primary sources of wealth creation represented in the Forbes 400 involve “idiosyncratic risk” — the kind of risk that, according to the tenets of modern portfolio theory, “rational” investors can and should eliminate by diversification. Yet most of the people on the list believed, and still believe, that focusing on what they know best is the least risky strategy.
That doesn’t mean that the average investor should forget about having a balanced portfolio, though. Chhabra points out that just because it worked out for the 400 billionaires on the Forbes list doesn’t mean that it’s a good idea. For every high-profile success story, there’s sure to be plenty of lesser-known failures.
He also notes that landing on the Forbes 400 is one thing, but staying on it is another. Only 36 people who were on the original list in 1982 remained on it for the next 24 years. So while this strategy may be effective when it comes to building wealth, it may not work so well for maintaining it.
For the average person, it’s still a good idea to have some variety in your investments. Here’s how to do it, and here’s what a truly diversified portfolio looks like.