Most high net worth investors make their biggest investment gains through long-term buy-and-hold strategies. They also use credit to strategically build wealth and give greater priority to tax implications than achieving higher returns when making investment decisions.
These are among the key findings in the 2016 annual "U.S. Trust Insights on Wealth and Worth" survey. Part of the Global Wealth and Investment Management unit of Bank of America, U.S. Trust polled 684 high net worth and ultra-high net worth adults, dividing respondents equally among those who have between $3 million and $5 million, $5 million and $10 million, and $10-plus in investable assets.
"Perceptions of the wealthy in history and popular culture have been painted with a broad brush that doesn't reflect the majority of financially successful people in society," says Keith Banks, president of U.S. Trust. "The insights we've gained through extensive research over the years give us a more accurate portrait of the modern day wealthy. It's an increasingly diverse group of men and women of all ages and backgrounds.
"Their advantage in life is not rare financial privilege but rather basic values, discipline and sense of potential shaped by family from an early age, which equipped them to make the most of every opportunity," he adds.
When asked what they attribute most to their success, the top three responses were: hard work, ambition and family upbringing. Through analysis of survey findings, U.S. Trust found these similar characteristics about the wealthy:
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They built wealth over time: 77 percent of those surveyed came from middle class or lower backgrounds, including 19 percent who grew up poor. They earned wealth over time, most of it through income from work and investing.
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Basic, long-term approach to investing: 86 percent of HNW investors made their biggest investment gains through long-term buy-and-hold strategies, traditional stocks and bonds (89 percent), and small wins (83 percent) versus taking big investment risks. Their use of more sophisticated investments grows as their wealth increases.
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Opportunistically optimistic investors: More HNW investors are optimistic than pessimistic about investment returns over the next 12 months. Nearly three in five keep more than 10 percent of their investment portfolios in cash positions, including one in five with more than 25 percent in cash on hand. Their top reason for doing so is for opportunistic purposes, including being in a position to invest on a sudden market downturn or rising trend.
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Use credit strategically: Nearly two-thirds consider credit as a means to strategically build their wealth. Four in five say they know when and how to use credit as a financial advantage.
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Make tax-conscious investment decisions: HNW investors know that real investment returns are really negative returns if they are gobbled up by taxes. Fifty-five percent agree investment decisions that factor in potential tax implications are better than pursuing higher returns, regardless of the tax implications.
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Invest in valuable tangible assets: 48 percent of HNW investors put their money in tangible assets such as farmland, investment real estate and timber properties that can produce income and grow over time with legacy value. One in five collects fine art — including one in three ultra high net worth art collectors who are now using art as an alternative asset class and a core part of their wealth structuring and philanthropic giving strategies.
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Disciplined savers, opportunistic buyers: 81 percent of HNW investors say that investing to reach long-term goals is more important than funding current wants and needs. This disciplined approach to saving and investing was instilled at an early age and becomes easier with the financial freedom that wealth affords.
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Advantage in life based on family values and upbringing: Four in five wealthy people came from families where their parents encouraged them to pursue their own talents and interests while setting firm disciplinary boundaries. These parents, for the most part, were tolerant of failures and mistakes along the way. The five family values most strongly stressed during their formative years were: academic achievement, financial discipline, work participation, family loyalty and civic duty.
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Strong family tradition of philanthropy: 65 percent say there is a strong tradition of philanthropy and giving back to society within their family.
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Marriage is a lifelong partnership: 86 percent of the wealthy surveyed are married or are in a long-term relationship. Most stayed married to the same person, avoiding the financial setback that divorce often creates. They tend to divide, rather than share, roles and responsibilities at home, including financial and non-financial contributions to family wealth such as caring for children. Almost all discuss important goals and values regarding the use of money.
The survey portrays millennials as highly optimistic, opportunistic and knowledgeable investors. Gen Y also is especially entrepreneurial and confident in their ability to improve their own circumstances while making the world a better place for themselves and others.
"It is noteworthy that while the survey uncovered several examples of generational differences, the one common thread that cut across all generations was the importance and impact of family values as key contributors to success," says Chris Heilmann, chief fiduciary executive of U.S. Trust. "As such, today's advisors should be mindful of that focus to engage in values-based planning conversations with their clients."
Overall, 72 percent of people surveyed said they have greater confidence in the private sector's ability to solve tough social and environmental issues than in the government's. Sixty percent believe that private money invested in public works and social programs can produce superior outcomes.
See the charts beginning on the next page for additional highlights from the U.S. Trust survey. (Click on the slides to enlarge.)
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