Do the 1% invest differently than the vast majority of us? Do they invest smarter? What, if anything, can the 99% do to narrow the gap?
Here's the good news: Investment advice, strategies and asset classes that were once the sole province of the moneyed elite are now broadly available to five-figure portfolios as much as they are to eight-figure ones.
1. Online Access To High-Quality Investment Advice
Over the last couple of decades, most industries have been disrupted by technology and are now being powered by online services. For example, the travel industry once was served by travel agents, who are now few and far between as individuals research and book their vacations online. Traditional brick-and-mortar book retailers such as Borders have given way to the Amazon juggernaut. Netflix turned the at-home entertainment industry on its head, trouncing once-dominant Blockbuster. And, of course, let's not forget how iTunes has transformed the music industry. The list goes on.
The disruption has finally arrived for the investing industry as well. In-depth, high-caliber investment advice provided by traditional wealth management firms was once available only to the wealthiest segment of investors. Now, with access to technology that provides real-time data and analytics personalized to the investor's needs, new tools and services give all investors access to high-quality investment guidance, no matter if they have a portfolio of $50,000 or $5 million.
2. The End Of The Tyranny Of The High Account Minimum Fund
Two words could sum up the longstanding advantage enjoyed by those among us with very high net worth: 'account minimum.' This refers to the minimum amount of funds an investor has to have in order to invest in a certain fund or other vehicle, and that amount can range from $100,000 or so for a separately managed account (SMA) to several million dollars or more for entree to an elite hedge fund.
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Those account minimums put them off-limits to all but the wealthiest sliver of our economy. Even for a family that has, say, $200,000 to invest, a $100,000 account minimum is a non-starter because it would mean that 50% of the total asset base would be invested in one exposure -- not a prudent diversification strategy.
It's simply a fact that many fund managers need to (or claim to need to) maintain the high account minimums in order to operate profitably. However, the fact that a $20,000 portfolio can't gain access to the high minimum SMA or hedge funds does not mean that these strategies are off-limits to the 99%.
An increasing trend in recent years among separate account managers has been to launch mutual fund versions of their SMA strategies. These mutual funds employ the same thought process, and their holdings reflect the same asset selection choices that are invested in the separate accounts -- but they are available to retail investors in the same way as any mutual fund.
The same may not be true for hedge funds -- hedge fund managers typically don't operate mutual fund versions of their strategies, as that would require a level of disclosure and transparency they are not willing to countenance. However, we are increasingly seeing the emergence of traditional hedge strategies -- approaches like market-neutral, directional long-short, distressed assets or fixed-income arbitrage -- appearing in mutual fund form. Veteran hedge fund managers will sniff that these SEC-registered vehicles can't possibly replicate the brilliance and nimbleness of their strategies. But given the generally poor performance of many hedge funds in the last five years or so, those dismissive comments may not worth paying attention to.
3. The Emergence Of The ETF
Exchange traded funds (ETFs) are truly a revolutionizing innovation that has changed the face of the capital markets in the 15 or so years that they have been a fixture on the scene.
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ETFs provide direct exposure to targeted asset classes by replicating the performance of benchmarks in those classes. This means that a portfolio of nearly any size can obtain surgical exposure to a wide range of asset classes, encompassing equities, fixed income and alternative asset classes such as commodities, REITs and -- yes -- even those same hedge strategies mentioned above.
Most good investment advisors will tell you that the most important thing you can do to improve your chance of long-term investment success is to maintain a disciplined diversification among assets that exhibit low levels of correlation with each other. Moreover, with ETFs, you can hold a core component of high-quality assets that likely will change little over many years while retaining a peripheral, or satellite, allocation (say around 20% of total assets) that can move in and out of opportunities on a more tactical basis.
Say you want to take advantage of a possible boom in emerging Asian equities or the price of crude oil. There are ETFs available that give you these precise exposures. That kind of flexibility would have been hard to achieve for portfolios of less than $100,000 in pre-ETF days.
The Investing Answer: The good news is that with mutual funds -- and increasingly more so with ETFs -- ordinary investors like you and me have access to a wide range of many once-remote investment strategies and vehicles. But with the number of funds on the increase, the downside is the complexity involved in selecting the right funds to make up an efficient portfolio that is well-suited to your goals. And so it's back to the software revolution I referred to earlier.
Just as Amazon or Netflix are harnessing the ability to intelligently make personalized recommendations, so too is a nascent online investment software industry beginning to emerge that offers personalized investment guidance.
The availability of low cost funds -- together with high-quality investment advice that is accessible online -- perhaps puts ordinary investors in the strongest position they have ever been to make intelligent investment decisions.
Kevin Cimring is the cofounder and joint CEO of Jemstep.com, which believes that all investors should have access to high-quality, transparent investment advice.
