Many wealthy investors do not believe that higher risk translates to higher returns. A study by the National Bureau of Economic Research (NBER) looked at 2,484 people in the U.S. with at least $1 million of investable assets and how popular academic theories apply to the way they invest.

Of the group surveyed, 18% have at least $5 million and 4% have at least $10 million. In looking at the portion of equity in these millionaire investors’ portfolios, the authors of the study determined that the most important factors determining equity allocation are “professional advice, time until retirement, personal experiences, rare disaster risk and health risk.” Notably, these individuals did not believe that more risk was associated with higher returns. They believe that “high-momentum and high-investment-expenditure stocks offer low risk-adjusted returns, featuring lower expected returns and higher risk. Value stocks are thought to have both low expected returns and lower risk.”

The five factors determining the percentage of equity in millionaires’ portfolios described as either being “very important or extremely important” by at least 20% of respondents to the study are broken down as: 33% of respondents use advice from a financial adviser, 24% use their personal experience of investing in the stock market, 23% use their experience of living through stock market returns, 23% evaluate the risk of an economic disaster (like the Great Depression) and 20% assess the risk of illness or injury.

Of those respondents who were currently employed, 26% said that the number of years until their retirement was also an important factor in deciding their equity allocation. Among the least important factors are loss aversion, external habit, illiquid non-stock investments, advice from peers or media and a desire to become wealthier than other rich people.

Respondents holding more than 10% of their net worth in a single company’s stock are most likely to hold a concentrated position because they think it is a superior investment.

The study’s authors add that they looked at “how individuals consciously perceive themselves to have made financial decisions.” Even if these respondents might not have “full insight into the true reasons behind their decisions,” it is still important to gather this information because an investor’s perception of their decision-making process will not be “entirely unrelated” to their true process.

Source: “Millionaires Speak: What Drives Their Personal Investment Decisions?,” by Svetlana Bender, James J. Choi, Danielle Dyson and Adriana Z. Robertson; National Bureau of Economic Research, October 2020.

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