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How Rich People Invest Their Money In Stocks

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You have a portfolio of stocks and you have a strategy. But you wonder if you are using the right strategy, if there is such a thing. It is always good to check out what others are doing, basically benchmarking your strategy against others. Especially the people who have obviously succeeded - rich people. Rich people may be rich for several different reasons: they inherited their money, they won the lottery or they just worked a lot. Never mind that. We just want to know what they do with the money right now.


A commonly used stock portfolio strategy says to put your money into 10-15 stocks, 
spread over 5-6 different sectors and 2-3 different markets. Common sense tells us this is a quite secure strategy. So what are the millionaires out there doing? A recent study of the customers of a Nordic bank shows that the 1000 wealthiest people in that bank had their money invested in on average 19 stocks. That is quite a lot, about 50-100% more than the common portfolio strategy tells us. But remember that this is an average and that a few of the people in the study had invested in several hundred stocks, clearly skewing the result. So it seems that most of the rich people actually do follow the common strategy.


Okey, so now we now how the rich invest in stock. But wait - that is not the whole story. Those people actually only invest about 20-25% in stocks and the rest in other financial assets like real estate, bonds, private equity, hedge funds, etc. A very clear diversification of assets. Why, you wonder? Capital preservation. Capital preservation is key for any investor. They do not really care about increasing their wealth as much as preserving it. So diversification is important.
It is a bit like the common stock portfolio strategy, but on a higher level. 10 different stocks translates to 10 different types of assets. Different stock sectors translates to assets moving up or down with low correlation between them. So a good real estate strategy would employ the same thinking and acquire real estate in different areas, with different kind of tenants, et cetera.


There you go. Stop holding your breath. It seems you are probably using a good and tested strategy after all. Because you are using the common portfolio strategy for your stock investments, are you not?



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