THE BLOG
09/29/2014 12:13 pm ET Updated Nov 29, 2014

Rich People Are From Mars

Size Matters After All

At least according to a recent study that reveals the truth about how people value investments. Sadly, the researchers uncovered a rather disturbing phenomena. This finding may best be described as a paycheck viewpoint. This research was conducted in order to discover which investments people would consider to be the best. (Side note: of course there is a very obvious flaw with this whole premise, more on that in a moment.)

You do know the name Gallup of course. Gallup has been studying human behavior since its founding back in 1935. In this case, Gallup recently conducted a survey to examine which investments Americans would rate as the best. Specifically, the survey questions were about the best long-term investment choices. The possible answers were gold, stocks, mutual funds, savings accounts, CDs, bonds and real estate.

Looking thru the Paycheck Window

Interestingly and perhaps disturbingly for what it says about the financial literacy of the average American, the results were wildly skewed down two separate income lines. Gallup found that Americans earning $75,000 or more per year chose real estate as the top investment choice. Is this a case of being more in the know, or are rich people different from the rest of us?

On the other end of the scale, those Americans earning less than $30,000 per year turned out to wildly favor gold as the best investment choice. The group in the middle, those earning more than $30,000 but less than $75,000 did not really express a strong preference for either stocks or real estate, favoring each about equally.

In other words, the size of the paycheck seems to influence what is considered to be the best investment choice. However, all of this misses the real point. The fact is that there is no one size fits all solution. That is to say the entire survey is based on a false premise, a premise of there being such a thing as a best investment choice.

Spoiler Alert

There ain't one, at least that has been made public. There is no best choice for anyone, no matter what the size of the paycheck. The reality is that each person's financial situation is unique. Thus, by definition there can be no "best solution."

Reality Check

Hey, if the Gallup Survey questions were, shall we say, "loaded," is there a another way to look at investment choices? The answer is a resounding YES. You see, choosing the proper investment for your personal situation is not an election. Moreover, it may not necessarily be a good idea to "follow the crowd."

What the Numbers Say

What if you took a whole new perspective on the idea of best investment choices? What if you very smartly asked which investments earned the highest returns over say a 20-year period? Might that be a better way to figure out what really works instead of conducting an opinion survey? The answer is yes, of course.

With that in mind, take a look at this little snipper from MarketWatch. This comes to us courtesy of Mitchell Tuchman, writer for MarketWatch, who recently reminded everyone of the importance of making sure the entire portfolio is balanced.

He did his homework and came up with these numbers that you really should at least be familiar with before you part with your hard earned money for yet another investment.

• REIT 11.2%
• GOLD 8.4%
• S&P 500 8.2%
• BONDS 6.3%
• HOMES 2.7%

OMG! Do you see that? Take a look at the annualized returns posted above. According to this data, you could make the case that the lower income demographic may be on to something. Look at that, an 8.4 percent annualized return over the last 20 years. Residential real estate, on the other hand shows up with a meager 2.7 percent. Side question: does 2.7 percent rate of return even cover inflation over 20 years?

Conclusion: Stop it!

Stop looking for the easy button. The one size fits all approach cannot work in your favor over the long run. You owe it to yourself and your wallet to take the time to understand the real numbers about investments. As you can see from the real return rates above, it's the size of the annual returns that matters the most.