What's the smart money doing with their money these days? Investing in America.
That's not a pep talk; it's reality, according to a man who should know: Charlie Buckley, a managing director of UBS who runs their American Global Family Office practice. His group advises very wealthy entrepreneurs, typically clients with from $2 million to over $1 billion in investable assets. Most have built their wealth by starting companies that create jobs and add to economic growth in America.
Some of these successful entrepreneurs have now sold their businesses to larger companies. And what are they doing with their cash? According to Buckley, they've become very positive about starting to build new companies. They see most of the ingredients for entrepreneurial success lined up in the right direction, Buckley notes.
There is plenty of capital available at low interest rates. There's a perception that America is growing again, albeit slowly, and is in far better shape than the rest of the world. And consumers and businesses have de-leveraged, creating potential purchasing power.
The Rich are Different ... or Not
You might be wondering how this positive view of the future impacts your own investment and financial planning. After all, you may be thinking, the rich have a different risk tolerance. They're not worried about making mortgage payments or saving for college for their children. You're right about that.
Buckley says privately held entrepreneurial business leaders have a special appetite for risk. In fact, that's likely what led to their initial successes. In addition, he explains, those who have private companies have the ability to "look past a few quarters of frictional cost associated with making changes." In other words, they take a longer term view rather than the quarter-to-quarter earnings reports demanded of public companies by Wall Street.
Perhaps that smart money viewpoint can be helpful to those just starting out, either to build businesses or simply invest in the stock market. Here are a few key lessons to be learned.
--Take a long term perspective. Morningstar's research unit Ibbotson Associates has just released its latest long-term (since 1926) analysis of the growth of money in the stock market versus the returns generated by bonds or safe money investments compared to inflation.
One dollar invested in a diversified portfolio of large company American stocks (with dividends reinvested) over that long run has had an average annual return of 10.1 percent. That compares to 5.7 percent for government bonds and 3.5 percent for Treasury bills, which slightly beats inflation at 2.9 percent on average for the period.
Yet most ordinary investors don't get such returns because they don't have the discipline to stick to a long-term investment plan. They are impatient or fearful or greedy -- not the qualities of a successful entrepreneur or investor.
--Understand your risk tolerance. Only the successful entrepreneurs wind up with enough money to need a "family office." Many try and fail. But that's why the rewards are so big if you take risk and succeed. Economic growth is not a zero-sum game, with losers funding the winners. Instead, the successful entrepreneurs build companies and create jobs -- helping generate wealth for others.
But as an individual, if you have responsibilities or less personal tolerance for risk, you have to be smart enough to minimize the risks you take -- or at least diversify risk, so you're not putting your entire life on the line. In the stock market example above, risk is diversified by choosing a portfolio of stocks -- and by taking a longer term time horizon. Risk is not about any one investment; it's about the way you manage your entire life.
--Look forward instead of back. Successful entrepreneurs have a special dose of optimism. They view the glass as half empty -- and think their hard work can fill it up and even make it run over. They don't allow negativity of past experiences to overwhelm current reality and are always looking for a positive outcome.
These lessons seem to have worked well for the entrepreneurs who recount stories of starting from nothing to create their businesses -- and opportunities and jobs for others. They're worth adopting. And that's The Savage Truth.