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Financial Freedom

Forbes Richest 400: The Latest List Reveals A Surprising New Wealth Strategy

Forbes Richest 400: The Latest List Reveals A Surprising New Wealth Strategy

by Dr. Mark Skousen, Advisory Panelist, Investment U
Friday, October 5, 2007: Issue #717

As a former columnist for Forbes, I always look forward to the magazine’s “400 Richest People in America” issue that comes out every fall. I own every copy since Forbes issued its first edition in 1982.

The lives of the rich (and usually famous) are a fascinating subject, and one can learn a lesson or two about wealth-building by studying them. But first, let’s look at what goes into making the list.

The Characteristics of Forbes 400 Richest People

Here are some important facts of the current Forbes Richest 400:

  • Inflation takes its toll: Minimum net worth to be on this year’s list is $1.3 billion. For the first time ever, you aren’t guaranteed to make the Forbes 400 just because you’re a billionaire!
  • Divorce doesn’t pay: Despite several high-profile cases of triple divorces, the vast majority of Forbes 400 (68%) are married to their first spouses, with an average of more than three children. Only 11 (2.7%) have never been married.
  • Wealth isn’t inherited, it’s earned: Only 74 (18.5%) members of the Forbes 400 inherited their entire fortune, and 56 (14%) inherited at least a portion of their fortune. A large majority (270, or 68%) were entirely self-made billionaires who started from little or nothing. The average net worth of the self-made Forbes 400 is $3.9 billion.
  • Ivy League education isn’t essential to making it big: Only 93 (23%) graduated from a top Ivy League school, such as Harvard, Stanford, Yale or Princeton. Many of the super-wealthy are self-made and self-educated.


Forbes 400 Richest People: The Most Shocking Change in 26 Years

In the 2007 edition, the magazine looks back on the past 26 years of Forbes 400 lists, and reveals a surprising fact.

For years, based on my research into this list, I made the point that financial independence is usually achieved by creating one’s own business, not by steady saving and prudent investing. Wisely managing your money just didn’t cut it compared to wisely managing your own business.

Here’s what I said two years ago in Investment U #475 (October 6, 2005):

Every issue of the Forbes 400 repeats the same lesson over and over again: The best way to build financial independence is through your own business Of the Forbes 400, the vast majority (294) made it by working overtime and building great businesses in insurance, oil, technology, consumer products, entertainment and real estate. A larger number (around 40), inherited their wealth, but the inheritances came from successful businesses – David Rockefeller from Standard Oil, the Waltons from Wal-Mart, etc.

But now I’m changing my mind.

I see an unmistakable trend over the past 26 years: In 1982, oil and manufacturing fortunes ruled the first Forbes 400 list, and only 36 of the super-wealth made it in finance. But these days Wall Street is king. More than 100 of the Forbes 400 are from finance and investments!

Granted, many of the financial geniuses made the list by managing money. Forbes columnist Ken Fisher, whose firm now manages $42 billion, is an example. But there’s no denying that a prudent investment strategy can grow extremely fast if you consistently beat the market. The Warren Buffett Way can be imitated!


Yale’s David Swensen Proves You Can Beat the Market

I firmly believe you can beat the market for years if you put your mind to it. Take David F. Swensen, chief investment officer of Yale University’s endowment fund since 1985.

Under his leadership, Yale investments increased from $6 billion to $22.5 billion, returning an annualized profit of 18% over the past 10 years. That’s two percentage points above the market averages, and well beyond more conservative endowment funds.

Moreover, Yale’s fund did not suffer a single down year during the difficult 2000-2003 bear market. And last week, Yale announced that its endowment fund gained 28%.

Swensen is considered the Babe Ruth of endowment funds managers.

How does he do it? He devised a program involving greater diversification into other asset classes, including foreign markets, natural resources, and alternative investments in hedge funds and private equity funds. In his book, “Unconventional Success,” Swensen outlines the following “multi-asset” class of investment portfolio, consisting of six asset classes in the following sample:

Asset Class %
Domestic Stocks 30%
Foreign Developed Stocks 15%
Emerging Market Stocks 5%
Real Estate and Natural Resources 20%
U.S. Treasury Bonds 15%
U.S. Inflation-Protected Securities (TIPS) 15%

Note how vastly different this multi-asset portfolio is from the conventional corporate, university, or charitable endowment fund. Instead of 70% in bonds, Swensen reduced the bond component to 30%, half of that in TIPS. Instead of 30% in stocks, he increased his position in equities to 50%, with a large exposure in foreign markets. Swensen argues that such an unconventional asset fund can beat the market with less volatility if the assets inside the fund are “non-correlated.”

By that, he means that the various assets move in different directions when market trends change. (This is the same philosophy, by the way, of your chairman, Alexander Green. See how to profit from his Asset Allocation Model in today’s Crib Sheet.)

If inflation rises, for example, domestic stocks might decline, but real estate and natural resources – known as inflation hedges – might counterbalance stocks and keep the portfolio from declining significantly.

You may not be running an endowment fund, but you can certainly achieve superior market returns by taking this approach – investing in non-correlated asset classes – and even do it tax-free inside your IRA or 401(k).


Swensen’s Tips for Investing Success

In his book, “Unconventional Success,” Swensen makes three general recommendations:

  1. Diversify into the six asset classes listed above.
  2. Rebalance your portfolio to the original weightings of these asset classes on a regular basis (once or twice a year).
  3. Emphasize low-cost index funds and exchange-traded funds (ETFs).

He is critical of actively-managed mutual funds, which are not likely to beat the markets (as noted above) because of high fees, taxes, and the superiority of competitors. The Yale investor sets high standards: “Of the 9,000 or 10,000 mutual funds in the United States, a mere several dozen merit the consideration of thoughtful investors.”

Good trading,

Mark


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