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WHAT CAN WE LEARN FROM THE INVESTMENTS OF THE SUPER-RICH?

| August 09, 2018
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About a year ago, David Bailin (no relation) took over as the Global Head of Investments at Citi Private Bank.  The private bank serves clients with accounts of $25 million or more.  At that time he decided to determine if there was any difference between clients who followed their advisor’s recommendations, and those that didn’t.  According to Bailin, those that followed their advisor’s guidance outperformed the non-followers by 2-3% per year for both 1-year and 3-year timeframes.  Bailin determined the 2 main reasons for the significant underperformance of the non-followers was:

  1. They overweighed their portfolios toward US stocks. Part of the aversion to foreign investment is the erroneous belief that there would be a worldwide economic downturn like the Great Recession. The folly in this thinking is that recessions are generally regional and not global.  Only in 2008-09 and World War II has the whole global markets fallen in unison.
  2. They held too much in cash. “I’m not talking a small amount of cash here,” Bailin said.  “The only person who makes money is the bank.”  In hindsight, it is hard to believe investors thought holding their investments in cash was the preferred choice.  Since the trough in 2008 the S&P 500 rose by more than 300%.  While cash offered safety, there were several other safe assets also available at that time that offered a greater reward.

How do these lessons apply to your portfolio?  Both reasons for underperformance cited by Bailin were due to an investor’s emotions overruling their logic.  A belief that the U.S. stock market will outperform foreign markets, or that there will be a global collapse in values is unfounded by fact.  Keeping your investments in a safe cash position for fear of a stock market downturn like the one experienced in 2008-09, is also driven more by emotion than fact.  These investors would have been much better served heeding the advice of their Investment Advisor, who made their recommendations based on research and years of experience.

The bottom line—Citi’s Private Bank clients paid a pretty penny for advice they choose to ignore, costing them even more money in lost potential gains.  Perhaps the title of this post should have said, “What Can the Super-Rich Learn from You?”

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