Where the Rich Are Keeping Their Money

There are more rich people today than ever before, and they are richer than ever before. The number of people with more than $1 million of investable assets jumped 8.3% last year to 10.9 million, their total wealth booming 10% to $42.7 trillion. That surpassed the previous peak in 2007. Recession? What recession?

The really rich — those with more than $30 million — are doing even better. Their wealth worldwide jumped nearly 12% last year. It’s great news for the rest of us, because it means we can all get jobs as butlers or scullery maids.

So where are the rich keeping their money? Turns out hedge funds are out, and stocks are coming back in.

All that talk about a big gold bubble? It’s a bunch of hooey.

According to the latest survey, the rich are keeping just 5% of their money in “alternative investments” — from gold and commodities to hedge funds. That’s down from a peak of 10% in 2006, and lower even than the 6% seen at the end of 2009.

Also, 22% of the money dedicated to “alternatives” is in commodities. These therefore account for barely 1% of their total wealth.

I’ve said this before, and I’ll say it again: If we’re really in a “gold bubble,” as I keep hearing, shouldn’t more people actually own some gold? Some really smart investors — like Charles de Vaulx at International Value Advisers — argue that everyone should keep maybe 5% or so of their money in gold at all times. But even the rich aren’t anywhere near it.

Meanwhile, hedge-fund allocations are falling. Hedgies are still suffering from the Bernie Madoff effect. John Theale at Merrill Lynch also says wealthy investors have been moving away from anything that’s illiquid. They don’t like opaque investments they can’t sell in a hurry.

They’re more likely to own long-short or hedged mutual funds or other regulated investments, he adds.

The core of the rich portfolio is surprisingly conservative. The wealthy have, on average, 43% of their holdings in low-risk assets. That’s 29% bonds and a thumping 14% in cash. So much for the idea that the more you have, the more risk you can take. (It matters, of course, that the rich are typically much older than the rest of us, and are therefore more likely to be risk-averse for that reason.)

They still only have 33% of their money in equities — a slow climb back from the 25% lows seen at the end of 2008. Ominously, while that 33% figure does not seem very high, it nonetheless equals the levels seen just before the crash. And the rich told surveys that they are planning to ramp up their equity holdings pretty substantially this year.

Real estate — not counting the primary home — fell from 19% to 15%.

There are some serious differences from region to region. Here in the North America, the rich are much keener on stocks. Equities account for 42% of their investments, up from 36% at the end of 2009. In the Asia-Pacific region not including Japan, the biggest investment is real estate. The Japanese rich are by far the most conservative: They hold 55% of their portfolios in cash and bonds.

If investors can draw conclusions from this, it may be to think twice about investing too much in the U.S. equity market, which is far too popular with everyone, and instead to take another look at Japan. Even the Japanese don’t like the Japanese equity market; that seems like a sign of bear-market capitulation to me.

Finally, the rich in every region have invested most in their own region. The North American rich have 76% of their money invested in North American assets. As I’ve observed before, this is absolutely crazy. We are all naturally “long” our home markets anyway, because this is where our homes, lives, careers and networks are based. We should be most invested overseas.

Are these people really smarter with their money than the rest of us? It doesn’t look like it. Maybe they just have more of it.