Diversification Reaps Dividends
While billionaire investor Mark Cuban famously mocked investment diversification, elite entrepreneurs like their eggs in multiple baskets.
Allocate your assets broadly to assure your future is a golden rule of wealth management and this remains true for even the world's most successful entrepreneurs.
Conventional wisdom suggests spreading your portfolio to protect against financial shocks and Elite entrepreneurs pay heed to this mantra, with their investments spread across almost 10 different asset classes.
"I don't like stuff I have to actively manage," says Sramana Mitra, Chief Executive and Founder of Californian virtual incubator and accelerator One Million by One Million (1M/1M). "I don't buy individual stocks – I don't have the time."
This is backed up by the findings of the BNP Paribas Wealth Management 2017 Global Entrepreneur Report, which interviewed 2,650 elite entrepreneurs worldwide with an average net worth of $14.9 million.
Despite being innovators in their respective industries their mindset for deciding how to invest their wealth is remarkably similarly.
Respondents' average allocation across nine asset types was 12% stocks, 12% bonds, 13% cash, 11% private equity, 16% in own businesses, 8% hedge funds, 8% socially responsible investments, 12% real estate and 7% angel investments.
Digging into the report, respondents aged 55 or over stood most apart, with 16% in stocks versus the overall average of 12%.
They are also overweight in fixed income (14% vs 12% average), cash (15% vs 13%) and real estate (14% vs 12%) – all long-standing asset classes - but underweight in less traditional investments such as private equity (9% vs 11%), hedge funds (4% vs 8%), and angel investments (4% vs 7%).
WEALTH PRESERVATION SOCIETY
"Inevitably the older generation of entrepreneurs are more focused on wealth preservation and wealth transfer rather than wealth creation, which is a bigger priority to younger business owners," the report states.
Despite the comments of billionaire entrepreneur and investor Mark Cuban, who famously told the Wall Street Journal that asset diversification was "for idiots", cash-rich and time poor elite entrepreneurs like to hedge their bets and put their trust in their financial advisors.
The mid-aged entrepreneur group – those 36-55 years old – showed no notable variations from the mean, while millennials only differed in angel investments (9% vs 7% average).
Analysing entrepreneurs by net worth, the wealthiest two groups – those with assets valued at $10 million to $25 million and those with holdings worth more than that – allocated all their assets within 1 percentage point of the averages.
The entrepreneurs worth less than $5 million were underweight on hedge funds (5% vs 8%), but overweight in cash (15% vs 13%), own businesses (18% vs 16%) and real estate (14% vs 12%).