There is a reason why you don’t see many investors get interested in physical ownership of real estate until they can ensure that they can afford a property management company to run the day-to-day operations and the size of the family wealth is substantial enough that a single apartment complex won’t consume most of the family’s assets. In effect, this means that outright physical real estate ownership in the portfolios of investors with less than $1,000,000 in investable assets but takes off quickly once you study the assets of investors that have over $2,500,000 to invest. So why don’t you see a lot of real estate investments from the wealthy before that $2.5 million net worth point?
During the 2008-2009 financial crisis, approximately 1 out of 7 millionaire households liquidated 20% or more of their portfolios. The rest either stayed the course, refusing to part with their acquired assets at firesale prices or recognized the bargains that existed and bought more.
How is this possible? There are quite a few causes, and one of them is cash.
Compared to the middle and upper class, millionaire households have the liquidity to endure crises at an extremely high level.
In fact, devotion to high cash balances is one of the few major differences between households of professionals and entrepreneurs.
In 1973, Pew Research asked the typical American whether it is okay tell “white lies” or “harmless lies” that were intended to spare the feelings of the lie’s recipient. Over 79% said that this type of lying was morally wrong.
In 2015, the question was asked again. This time, there was a steep drop, as only 43% said that this type of lying was morally wrong.
Unfortunately, America’s wealthy seemed to do its part to tilt the trend. In 1973, wealthy participants weighed in at 89% to say that this type of lying was wrong. By 2015, only 27% of the wealthy considered this wrong.
Other than oil and natural gas, guess what is the most widely owned commodity by the wealthy? As the headline gives away, it is timber.
Among households with over $2.5 million in investments excluding their primary residences, the average allocation to timber is almost 8%. Although timber does seem to be something of an all-or-nothing investment selection. A slight majority–about 62%–own no timberland rights at all. But of those that do, the average allocation to timber investments in their portfolio is almost 17%.
Similar to partnerships, mutual funds pay no taxes themselves and operate on a pass-through basis (technically, the IRS puts mutual funds in the category of “regulated investment companies”). For tax purposes, the mutual fund distributes investment income to the fundholders, and depending upon the classification of the income, the fundholder will then pay taxes on the income received.
Generally, a mutual fund makes one of the following six types of investment distributions to its fundholders: (1) a return of capital distribution; (2) short-term capital gains; (3) long-term capital gains; (4) qualified dividends; (5) unqualified dividends; and (6) tax-exempt interest dividends.