I’m Rich! I’m Really Rich!

Hi Scott,

As a result of recently selling our (multi-generation) family business, my husband and I are now $34 million wealthier (after tax). We have gone to see a firm that specialises in helping ultra-high net worth families like ours. The portfolio they have recommended is not open to the general public (it’s only for sophisticated private equity funds and the like). There are multiple fees that add up to around 1%, though they say they will have stronger returns than we could expect from the share market. My husband thinks they sound great, but I am not sure. I told him I was writing to you for your opinion, and he laughed!

Janice

Hi Janice,

Congratulations on the sale — that’s a life-changing amount of money!

And now for the bad news: being filthy rich won’t buy you higher investment returns.

Really.

A good example is Harvard University’s $42 billion endowment fund (built up over many years by donations from Harvard alumni). Harvard has literally got some of the smartest people in the world managing their nest egg. Over the years they’ve deployed high-octane trading strategies, invested in private equity deals, bought natural gas pipelines, even ventured into exotic investments like forests in Latin America. They literally scour the earth to make money.

And yet their returns have failed to match a no-frills index fund over one, three, five, 10, 15 and 20 years.

All that hard work and effort, all that stress, all the millions of dollars in fees, to end up with less than you’d have by simply buying a broadly diversified, set-and-forget index fund.

So what would I do in your situation?

Well, understand that my opinion is worth roughly what you’re paying for it (nothing).

Yet my thinking would be that you’ve already made your fortune. So I’d focus on simplifying your life, not making it more complicated by paying an advisor 1% — which in your case amounts to $340,000 a year — to farm out your investments.

Instead, I’d think of your wealth like owning a farm: focus on harvesting dividends … you’ll earn close to $1 million a year. And just like farming there will be good years and bad years (and there will be 2020!). Yet over the long run there will be more good years than bad. And if you never ‘sell the farm’, you and your loved ones can sit back and reap a harvest for generations to come.