How to protect your money like the Forbes 400-richest Americans
By Mark Hulbert
Want to invest like the 400 richest Americans? Of course you do. Their average net worth is $7.2 billion, according to Forbes Magazine.
But that doesn’t mean getting shoot-the-lights out returns. In fact, only a handful of those on the Forbes list got there through investing. They instead made their fortunes elsewhere, and then went to Wall Street in an effort to preserve the purchasing power of their wealth.
Indeed, outperforming the 400 richest Americans over the past year wasn’t particularly difficult. Between Sep. 22, 2017 (the data cutoff for Forbes’ list last year) and Sep. 7 of this year (the cutoff for this year’s list), the net worth of those on this year’s Forbes 400 list grew by 7%. The S&P 500 SPX, -0.18%meanwhile, more than doubled that return, gaining 14.8% over the same period.
Even this 7% average gain overstates the case, since it reflects the increase among those on 2018’s list. Fifteen members of 2017’s list didn’t perform well enough over the subsequent 12 months to be in the top 400, and including their returns would no doubt bring the average down. (Forbes doesn’t report that figure.)
To put the Forbes 400’s average gain into further perspective, consider that the average investment newsletter portfolio monitored by my Hulbert Financial Digest did even better, gaining 8.1%. (See accompanying chart.)
To be sure, it’s unrealistic to expect any group of advisers to hit a home run every year. So you could dismiss this result over the last year as little more than the exception that proves the rule. But my eyeballing of past Forbes 400 lists suggests to me that the last year’s experience is not atypical.
The key is to understand what’s realistic through investing. Naïve investors mistakenly believe that the super-wealthy are bigger than life, possessing some magical sauce that is the secret to their investment success. And though the 400 individuals on the Forbes list may well be bigger than life in other ways, there is no magic to what they achieve through their investments.
If there is any investment magic, it’s that the wealthy have learned to be realistic about what’s attainable and so do not incur exorbitant investment risks.
Another way of understanding the investment significance of the Forbes 400 list is to imagine what your rate of return would need to be to make it onto the list at age 65, assuming you started at age 30 with $1 million. The net worth of the individual in 400th place on the latest list is $2.1 billion, and your investment return would need to be 24.4% annualized to turn $1 million into $2.1 billion over a 35-year period.
I can confidently say that no one has produced that return over a 35-year period. Consider Warren Buffett’s performance; he of course is CEO of Berkshire Hathaway BRK.A, -0.83% BRK.B, -0.91% and widely considered to be the most successful investor alive. Over the last 35 years, Berkshire Hathaway’s net asset value has appreciated at a 17.6% annualized rate.
The bottom line? You can invest like the 400 richest Americans. All you need to do is refocus your investment efforts on preserving the purchasing power of your portfolio over long periods.