The wealth gap in America has fostered different approaches for investors. Income levels determine whether a financial advisor recommends individual stocks, bonds, options, mutual funds, exchange-traded funds (ETFs) or other financial instruments. The wealth gap between average investors and wealthy investors has only widened since the economic crisis that commenced in 2007. As a result, it is important to consider how the range of income levels shapes the mindset for today's investors seeking to capitalize on the market.
Those who are considered wealthy constitute 1% of the total investing population. One key difference for this class of investors relates to their ability to make decisions in conjunction with the simple concept of diversification. While the idea of diversification sounds simple and rudimentary, middle class investors fail to pool their funds accordingly. This misfortune stems from the notion that they lack sufficient funds to diversify. In addition, affluent individuals or groups feel there is not as much pressure to yield higher returns, so they allocate funds across multiple investment types. The average investor can practice diversification by closely examining total assets available for investment. After determining this figure, one must allocate the assets across different industries and classes. For instance, technology, health care and manufacturing are just some of the more common industry types. Other asset classes include large-cap stocks, fixed-income bonds or money market instruments.
Financial circumstances also dictate the type of market an investor chooses. Wealthier investors show an inclination to invest in the stock market. Middle class investors tend to find the housing market to be a more appealing option. Investing in the stock market can become expensive. In most instances, a brokerage requires a minimum account balance and charges a fee or commission on each trade executed. A wealthier investor can easily absorb this fee; however, over time, accumulated fees become detrimental to a smaller investor's overall investment strategy. Moreover, certain stock brokerages only service clients classified as high net worth individuals (HNWIs). This barrier can make it difficult to gain access to all of the resources associated with trading on the stock market. Middle class investors access the real estate market through various investment instruments, including real estate investment trusts (REITs). While complex in nature, this option essentially encompasses an investment in a portfolio of properties, which can include both residential properties and commercial properties.
Real estate investments also include direct ownership of property.
The investment horizon is one significant difference between wealthy and middle class investors. This concept deals with the time frame when an investor expects to receive a full return on his investment. Investment horizons can be short-term, intermediate or long-term in nature. In most instances, the investor's anticipated retirement date determines the investment horizon. However, wealthier individuals show less concern for retirement since they have access to more available capital.
Portfolio allocation strategies often correlate with an investment horizon. Financial advisors note that as a shorter investment horizon looms, it is important to minimize risk to avoid misfortunes due to market volatility. An abrupt market shift can be extremely detrimental to an investor who will be seeking a cash position in the near future.
Less-wealthy investors, who are usually younger, tend to gravitate toward a much longer investment horizon. The wealth of an individual investor is difficult to define, but the investor's net worth is one common methodology. In simplest terms, the net worth of an individual investor is the remaining dollar figure after liquidating all of his assets and retiring all of his debt. This figure proves to be critical when planning for retirement and determining an appropriate investment horizon.