Even if you're not that well heeled, there's every opportunity to buy into a cornucopia of solidly run mutual funds and other compelling investment vehicles available to the general public. These funds pool money from retail investors together with billions of dollars contributed by high-net-worth individuals and financial institutions. Within each fund, everyone's money is managed exactly the same way. In fact, little guys may even have an advantage if they do their own homework instead of relying on financial planners or private bankers to tell them which funds to buy?typically in return for fat advisory fees that erode overall returns.
It is true the rich have access to specialized vehicles such as private equity and venture-capital funds, which invest for them in leveraged corporate buyouts, property in emerging markets, not-yet-public companies and other frequently high-risk, high-reward assets. Having more investment options can help individuals diversify their portfolios, in theory boosting returns while lowering risk. But the ability to diversify is no longer the exclusive province of multimillionaires. For example, thanks to the increasingly global operations of brokerages and stock exchanges, ordinary investors these days can quite easily buy shares of companies listed on most foreign stock markets. The range of financial products available to retail investors has also exploded. Want the stability and income stream offered by commercial real estate? From Singapore to France to the U.S., listed shares of real estate investment trusts (REITS) offer a simple way to invest at a low cost in a professionally managed portfolio of properties. Exposure to commodities? Exchange-traded funds (ETFs) are index fund-like vehicles put together by firms like Barclays Global Investors to track a wide variety of assets including gold, oil and uranium, as well as stocks sectors such as technology and entire countries like Taiwan or South Korea?all at an enticingly low cost.
What about hedge funds, which have become so popular with rich investors? Because of wealth restrictions, most are closed to small investors. (In the U.S., you need to be worth at least $1 million to participate.) But this isn't a tragedy for the little guy. Although hedge funds' flexible investment strategies are supposed to allow them to perform well in both bull and bear markets, a Princeton University study published last year found that from 1996 through 2003, average hedge-fund returns did not even match those of the Standard & Poor's 500-stock index. One reason: hedge funds typically charge annual management fees of at least 1%, plus 20% or so of any gains. And they're under tremendous short-term performance pressure?if they lose money their clients are gone. That makes it tough for managers to take a contrarian, long-term investment approach, which can be enormously profitable for those with patience.
Maybe some of the perks enjoyed by the rich are not so wonderful, then. Think of it this way: in the global investment casino, the snacks may be tastier and the liquor pricier in the VIP rooms?but punters rich and poor all face the same odds.