Legend has it that Ernest Hemingway and F. Scott Fitzgerald disagreed about the rich.
Fitzgerald, who has stars in his eyes, is said to have said, “The rich are different from the rest of us.”
“Yes,” replied Hemingway, who did not. “They have more money.”
That exchange may not actually take place, at least not in person. The story could simply be based on things the two of you said and wrote privately.
But either way: Who’s right?
Well, yes new research out that: Could be a bit of both.
When it comes to their portfolios, retirement plans, and assets, the truly rich can be different from the rest of us. And I don’t just mean they have more money.
Five economists from Harvard, Princeton and the University of Chicago analyzed detailed monthly portfolio data from Addepar, an asset management platform used by investment advisors. This gives them information on up to 139,000 household portfolios with total assets of up to $1.8 trillion. In other words, a decent sized sample.
They looked at what those investors did, month by month, from January 2016 to August 2021. While that span totaled less than six years, it included a lot of excitement. , including the turmoil surrounding the 2016 presidential election, the late 2018 market crash, the March 2020 COVID crash, and two severe booms.
Most importantly, however, economists were able to group portfolios by size. The sample includes nearly 1,000 “super high net worth” households with assets of more than $100 million each.
And they found something very interesting – and important.
While ordinary investors tend to buy when the market is up and sell when the market is down, those that researchers call UHNWs do not.
“We estimate how flows to illiquid assets respond to total stock returns across the entire wealth distribution,” the researchers write. “Very strikingly, we found that sensitivities fell sharply in wealth. In fact, the outflow of households with assets above $100 million is essentially insensitive to stock returns.”
In other words, “while less wealthy households act cyclically, UHNW households buy stocks during recessions.” (Acyclic means buying after the market is up and selling when the market is falling.)
Indeed, UHNW households are so countercyclical that they help stabilize markets during recessions. They are the buyers when others are selling.
This, of course, brings us back to the old, old paradox: The rich get richer.
Meanwhile, we already know that Ordinary investors and pop investors enter and exit the market at the wrong time. They sell after the market plunges and buy when the market has recovered.
Why is this problem?
That’s something to keep in mind if you’re thinking of selling your 401(k) stock funds now that the market has dropped a fifth.
It’s also something to watch out for in the near term when the market is exploding and you tend to jump in first.
The rich seem to have a tendency to pre-determine their balance between “safe” and “risky” assets and they try to keep that value at all times, rebalancing in a way when things are booming. and the other way when they are crashing.
It also raises an interesting question about the current market. Some market commentators have said that we won’t hit the market low until private investors bail. They cite, for example, personal customer data from BofA Securities.
Maybe they’re right. But how many of them are rich and how many belong to others?
For example, check out the latest data from the Investment Company Institute, the trade body for the mutual fund industry. It’s a very good proxy for the behavior of individual investors, at least everyone with a 401(k), IRA or something like that.
According to ICI, individual investors have been involved in the stock market throughout 2020 (of course, when should they buy). They then bought for most of 2021 (when, of course, they should have sold, especially near the end).
This year? They have bailed since April. Net selling increased rapidly in Q3.
None of this, naturally, indicates that the market has bottomed or is near a bottom or anything like that. Any market veteran will tell you that the market bottom can only be seen in the rearview mirror – and often it’s a long way back.
And the rich don’t own a magical crystal ball. John D. Rockefeller, then the richest man in the world, bought back the famous market after the first crash of Wall Street in 1929. “There is nothing in the business to warrant the destruction of prices. value took place on exchanges during the last week,” he said publicly. “My son and I bought some common stock for a number of days.”
Of course, it worked. But alas, he was about three years early. The market will drop another 80% before bottoming out. (To be fair, he could not have foreseen that the Federal Reserve, the US Treasury, and the US Congress would respond to the crash with crazy policies that would lead to a bad recession.) best in history.)
However, the next time you’re tempted to panic about the markets, you might want to ask yourself, “What would a really, really rich person do?”
