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Model The Rich… Stock And Bonds Are Out

Who are you modeling your investment habits after?

Most Americans are modeling their investment and financial habits after the wrong role models. The problem is following the wrong financial role models begins in childhood. Kids look up to their parents for advice and to set examples, but unfortunately, parents are not the best role models when it comes to finances and investing.

In the Parents, Kids and Money survey from investment firm T. Rowe Price, children ages eight to 14 gave their parents a B-plus as financial role models. That’s a way higher grade than parents deserve because only half of parents regularly set aside money to save; only 43% set financial goals; and only 24% take specific steps to diversify their investments, according to the study.

Seems like bad financial role models start from a young age.  

Even as parents are not setting the right example for their kids, to make matters worse, they’re not even talking to their kids about money and investing, and when they do, they lie to them or are not honest with them.

  • Most parents (77%) say they are not always honest with their kids about money; 15% lie weekly.
  • Half are willing to discuss saving and spending issues, but almost no one talks about tougher concepts like inflation (19%), investing (16%), diversification (11%), and asset allocation (8%).
  • A third avoids talking about the family’s finances altogether.

The right financial role models won’t be found in the home. It’s no better outside the home. You’re encouraged to contribute to a 401(k) at work. Still, nobody tells you that your 401(k) could be wiped out in a matter of months because of stock market volatility, and if you were planning to retire in a year when disaster strikes, your retirement plans could be thrown into complete chaos. Just ask all those potential retirees in 2008 who saw half their portfolios wiped out by the stock market crash caused by the subprime mortgage and real estate bust that launched the Great Recession.

If you seek financial advice or direction outside of work, chances are you’ll be encouraged by financial advisors to go the 60/40 route because it’s easy money for them. The problem is the 60/40 (60% stocks, 40% bonds) allocation strategy is outdated and ineffective. Bonds are meant to prop up portfolios when stocks dip, but bond rates are too low to counter slumping stocks effectively.

There’s recent precedence for the failure of the 60/40 strategy. Rewind to the first half of 2022 when the S&P 500 Index dipped into bear market territory, dropping about 20%. During this span, the 60%/40% mix of stocks and bonds declined by 16%. The only parties benefiting from the 60/40 strategy are all the Wall Street players that keep you reliant on stocks and bonds in a portfolio that will never rise above mediocrity.

So, who do you turn to for investment and financial advice?

Who should you be modeling if your parents, coworkers, and Wall Street all fail you?

The answer is the ultra-wealthy. They must be doing something right, so why not see where they’re putting their money and model their investment habits?

Investors are interested in how the ultra-wealthy invest and allocate their assets; they look to the members of TIGER 21.

According to its website, TIGER 21 describes itself as:

“an exclusive network of wealth creators and preservers, a peer membership organization serving as your own personal board of directors. Our Members consist of successful entrepreneurs, investors, and executives.”

To join TIGER 21, potential members must show $50M in investable assets. TIGER 21 isn’t shy about how they invest. They want to preach the gospel about investing differently than what you’ve been taught or told by your parents, corporate America, or Wall Street. Every quarter, TIGER 21 publishes its Asset Allocation Report showing where its members place their money.

Here is a chart of their allocations in the most recent quarter:

According to the latest asset allocation report, The members of Tiger 21 allocate more than half their portfolios to Private Equity investments (PE) (31%) and Real Estate (RE) (24%). Stocks come in third, and bonds come in even lower down the list.

So what is it about Private Equity (private company investments) and Real Estate that cause the wealthy to prefer these assets over stocks and bonds? These assets offer key elements to wealth that traditional assets cannot offer.

While gains from stocks are wholly dependent on appreciation – non-reliable appreciation depending on the industry and company – returns from Private Equity and Real Estate can be gained from reliable appreciation along with cash flow. Moreover, because these assets are not correlated to Wall Street, nobody has to worry about their investments being wiped out by a global crisis overnight.

Perhaps the greatest appeal of Private Equity and Real Estate investments is the opportunity to invest in them passively through partnering with knowledgeable experts. This not only frees up time for the wealthy to do the things that interest them but also allows for the creation of multiple income streams to compound wealth.

Income-producing private businesses (Private Equity) and commercial real estate have historically been reliable long-term sources of cash flow and appreciation – shielded from stock market volatility and recessions that act as hedges against inflation.

Reliable, above-market returns insulated from downturns?

What’s not to like about these alternative assets like Private Equity and Real Estate? Not much, according to the ultra-wealthy, who eschew traditional assets like stocks and bonds for PE and RE to generate wealth and achieve financial independence.

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