Last month we explored who’s holding all the cash reserves in the US. As a follow-up, let’s delve into who’s holding all the investments. Specifically, the percentage breakdown between individual investors and institutions.
According to the Investment Company Institute, it’s estimated that approximately 50% of large US companies are in the hands of investors like you and me. Another 15-20% is owned by foreign investors and sovereign wealth funds outside the US. Institutions such as pension funds, insurance companies, retirement plans, endowments, and non-profits are holding the remaining 30%.
At the surface level, most wealth is owned by institutions, how can that be? When you direct investments into your 401(k) and IRA, or buy a mutual fund, exchange traded fund, stock, or variable annuity it’s all via a large institution. However, these entities serve the individual investor as it’s their capital the firm is holding.
It’s the employee who is deferring a percentage of income into their retirement plan. It’s the family adding to their child’s 529 plan for college. It’s the dad contributing to his brokerage account and the mom who’s investing in her advisory account. It’s the employee accumulating company stock. It’s the annuity holder sending premiums to the insurance company.
The buying and selling of large US companies is influenced by individual investors. Our dollars and choices on what to buy and sell ultimately reflect what the institutions hold. This has both positive and negative impacts on company prices.
On the bright side, investing creates opportunities for your future. Putting a little away today may compound and be more tomorrow when you need it.
The flip side is recognizing that not all investors want the same thing. Demographics, age, income, investment experience, and risk tolerance will influence what’s bought and sold by individual investors.
Many have been buying and selling for decades while others are just getting started. All of us, regardless of our level of wealth, are in the same market. We’re selecting the same companies but each of us has a different tolerance for price movements.
How many investors have the required patience, discipline, and temperament to stay seated when their investments don’t meet their expectations? What happens when prices move up/down unexpectedly? We experienced this in early April through the tariff drama, which feels like a distant memory now as prices continue to climb.
It’s easy to invest when momentum is pulling prices upwards as your account expands in value. It’s an entirely different experience when prices are contracting and your wealth seems to be evaporating in real time. This often causes investors to jettison their investments for the safety of cash.
Not all investors are reacting. Those who understand price movement also accept volatility as the admission ticket in owning companies for the long run. To get long-term returns from US companies you must own them through all market cycles, both up and down.
We can’t control the actions of other investors, but we can control how we buy, sell, and hold our investments. How do we do this?
It starts with a conversation around your time and money. Planning first, portfolio second. It’s natural to lead with the caboose (portfolio) instead of starting with the engine (planning). This mindset is how our brains are wired. Why plan before and after you invest?
Finance is all about behavior. It’s hard to accept this truth; our actions truly speak louder than our words when selecting and holding companies. Human nature is a flawed investor as our emotions aren’t programed to manage price swings. That’s why having a friend who offers ongoing planning can keep you from reacting when the sky is dark. It’s not different this time, it never is.
Large US companies are half the picture. The other half should include small and medium-sized US companies. This also includes companies of all sizes and geography outside the US. Why? Diversification is owning all companies in the right percentage. Then systematically rebalancing your percentages back to where they started once a year.
Sure, you can do this on your own, but it’s easy to grow tired of the boring details, consistency matters. So does answering questions to clarify planning along your journey. The right portfolio for you will be figured out by your financial plan. This allows you to build and spend what you have with purpose.
