Are rich people better investors?

Here is an interesting factoid: If you perform a regression analysis of the returns of investors portfolios with all kinds of variables, one thing tends to be a significant driver of higher returns. Investors who are wealthier at the beginning tend to have systematically higher returns than poorer investors.

One may say that this is because wealthy investors have access to better performing investment products like hedge funds, but if you believe this, then I have a bridge (or hedge fund) to sell you. As Javier Estrada has recently pointed out once again, the average performance of hedge funds was pretty poor, not just over the last couple of years, but basically over the last two decades. Investors could have easily outperformed hedge funds with a simple portfolio of stocks and bonds (and saved themselves a ton of fees in the process).

Annual performance of hedge funds vs. S&P 500 and 60/40 portfolio

Source: Estrada (2021).

And lest you argue that hedge funds are not designed to outperform stocks but to provide high risk-adjusted returns, yadayadayada… Here is the same chart showing risk-adjusted returns. 

Annual risk-adjusted returns of hedge funds vs. S&P 500 and 60/40 portfolio

Source: Estrada (2021).

The higher returns of wealthier investors are not due to access to superior investment vehicles. Even if you just look at their equity portfolios, wealthier investors achieve higher returns than poorer investors. And Yosef Bonaparte has an explanation. He finds that wealthier investors simply put more effort into selecting their investments. They use more professional advice than poorer investors and take more time to do their research and select the right stocks or funds to invest in. The result is that compared to poorer investors they tend to have more diversified and better performing investments.

But why would richer people put more effort into their investment research? Here, I can only speculate, but one factor may be that wealthier people tend to have a bit more time on their hands (they tend to be older, so on average a higher share of them will be retired, for example). Also, many of the wealthier investment cohort will have a background in business and management and that will create some basic interest in investments. Plus, of course, for wealthier people, more money may be at stake and as a result, they simply may choose to invest more time to make sure they don’t invest their money in any stock but only into high-quality stocks.

Whatever the reason, the lesson for all of us should be clear. Investing is not something you can do in five minutes. It takes time and effort to create a good investment portfolio. If you don’t have the time to invest or don’t want to make that effort, then, please, at least ask an independent professional adviser for help. It may cost a fee for advisory, but it will be well worth it in higher future returns.