Young & Invested: Why wealthy investors earn higher returns
The answer isn’t as obvious as it seems.
Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.
This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 84
We live in an attention economy.
After a few years of working in the industry, I’ve become reasonably confident in my ability to predict which articles people will click on.
A story about managing risk, picking a superannuation fund or an ETF fee reduction might find an audience. Though if I told you Australia’s wealthiest held a particular stock that was currently undervalued, substantially more people would engage.
One of the most popular articles I’ve written for this column looked at the holdings within affluent Australian portfolios. This is an angle I knew would resonate, because it deliberately leans into a belief that seems to be hardwired into us.
You can see versions of this idea everywhere. Successful entrepreneurs are constantly asked for their business tips and fund managers rarely miss an opportunity to reveal their newest conviction.
The underlying assumption is that if someone has accumulated substantial wealth, surely there must be something to learn from them. Though lately I’ve been wondering whether we’re looking at the wrong thing.
When we look at wealthy investors, we’re usually interested in what they own. The more useful question may be whether they’re actually better investors in the first place. And if they are, why? These sound similar, but they’re all very different assertions.
If the affluent consistently generate superior returns because they possess skill, it might make sense to study their portfolios closely. On the other hand, if these results are explained by something else, it’s sort of the equivalent of buying Jordans and expecting to sink every three-pointer.
Are the wealthy simply better investors?
There are relatively few studies that directly examine the investment outcomes of households with substantial assets. One that does is Asset Allocation and Returns in the Portfolios of the Wealthy (2023) by Cynthia Balloch and Julian Richers.
The authors found a positive relationship between wealth and investment outcomes, where performance tended to improve at the higher end of the distribution. More notably, wealthier households achieved both higher raw and risk-adjusted returns. This is worth pointing out because an individual be able to outperform taking on excessive risk, but these households weren’t just swinging for the fences for incremental returns.
At first glance, this seems like a convincing victory for the ‘wealthy investors are just better’ camp. Earning better risk-adjusted returns could simply be the result of superior investing ability. However, the same research paper also uncovered another finding that somewhat complicated the picture.
Does wealth itself enable better returns?
Balloch and Richers found that as wealth increased, portfolios began to look fundamentally different.
Wealthier households allocated a greater proportion of their capital to alternative assets like private equity, venture capital and hedge funds. While listed assets remained a key component of portfolios, they increasingly gained exposure to opportunities that are often unavailable to retail investors.
One caveat to this is that higher allocations to private market assets can make return comparisons difficult. Because such products are often valued less frequently than listed securities, they may may exhibit lower reported volatility and shift risk-adjusted return metrics.
To address this, the authors also calculated counterfactual returns in which all private equity and venture capital returns were replaced with the value-weighted market return in each month. In plain terms, they tested whether the result still held when private market returns were substituted with public market returns.
The higher allocation to alternatives presents a problem for those hoping to blindly copy wealthy portfolios. If stronger returns partly stem from opportunities that require substantial capital, the lesson can’t just be to buy what rich people buy. “Accumulate enough capital to access private markets” is not exactly actionable advice for most. It’s less a strategy than an outcome.
The causation problem
When we see a wealthy person generating strong returns, it’s natural to assume the wealth is evidence of superior skill. In statistical terms, there’s a risk of confusing correlation with causation. I think some of the relationship might actually run in the opposite direction.
An individual with a $5 million portfolio experiences volatility differently from somebody trying to build financial security with a five-figure account balance. An affluent investor can likely tolerate extended periods of underperformance, spread costs across a larger asset base and pay for advice when needed. Wealth doesn’t just change a portfolio but also the conditions under which decisions are made. This creates a structural advantage that has little to do with investment selection.
This is why I struggle with the idea that such investors simply outperform because they’re more skilled. It’s entirely possible that some become wealthy because they’re unusually disciplined and patient. It’s also possible that once they’ve accumulated wealth, those same qualities become easier to maintain.
That sounds like semantic nonsense, but it does change what other investors should take away from observing this group. If wealth itself creates the conditions that allow good investing behaviour to flourish, then simply copying a wealthy person’s portfolio misses the point entirely.
Researchers at the Stockholm School of Economics approached the question from a very different direction. Rather than examining why wealthy people earn higher returns, they looked at why wealth becomes concentrated in the first place.
Their work found that differences in patience and willingness to bear risk explained a meaningful portion of asset accumulation at the top. Thus, this throws another variable into the mix. If patience is one of the traits associated with wealth accumulation, our own research may offer a clue as to why.
What the data shows
While investors may not be able to replicate the structural advantages afforded to the wealthy, there are other general behavioural traits that can explain relative outperformance.
One of the most significant findings in our recent State of the Australian Investor report was the apparent relationship between increased trading activity and declining portfolio performance.
Investors who made no trades during FY26 generated a median return of almost 12%, while those making over 100 trades made 9.6%. The probability of finishing the year positive also fell as trading frequency rose.
At first glance, this seems counter-intuitive, as modern investing largely celebrates activity. Fund managers often discuss their tactical allocations, while the financial media is constantly searching for the next big opportunity. The implicit messaging in this is that successful investing is an active pursuit requiring constant refinement and decision-making.
This doesn’t necessarily mean that frequent trading is always harmful. The report also found exceptional performers among the highly active trading cohort. But the typical investor’s experience became worse as trading increased. In short, for every one investor trading their way to outperformance, there are many more achieving the opposite outcome.
Concluding thoughts
When we analyse wealthy people, the conversation usually centres on what they own. I’m increasingly convinced this is the least interesting part of the discussion. I started researching this topic expecting to land on a somewhat straightforward conclusion. Though it does appear they tend to generate better returns, the more important question is why.
Some of it is undoubtedly structural. Research suggests the group benefits from access to investment opportunities that aren’t available to everybody. I’d imagine most readers aren’t going to wake up tomorrow with access to private equity funds or institutional managers, so these advantages aren’t particularly useful to emulate.
Another possibility is that behavioural traits like patience and lower trading activity contribute to both stronger investment outcomes and higher levels of wealth accumulation. The challenge is that it’s almost impossible to isolate exactly what’s driving the result. This article wasn’t intended to be a definitive analysis of why such investors outperform, nor do I think the evidence allows for one.
However, what seems very clear is that the answer extends beyond portfolio holdings alone. I think investors are likely to learn more by focusing on the process behind wealth creation than the assets that happen to sit inside these portfolios.
