The Wall Street Journal

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Once bit, Rich Shy From Risk Of Stocks

When stock markets swooned in 2008, Alan Mantell lost about 15% on his investments. Now, the multimillionaire real-estate investor and business consultant is more insulated from market quakes, after putting more money into cash and private businesses and less into U.S. stocks.

"Today, my first principle of investing is, do no harm, don't make major mistakes," said Mr. Mantell, president of New York-based Mantell Advisory LLC. "It's not about chasing returns anymore. For me, it's about real diversification and not being so dependent on traditional equities."

After taking big risks and big losses in 2008, wealthy investors have become the Cassandras of the financial world, hunkering down with cash, gold, farmland and other haven investments. Their "fear portfolios" largely protected them from last week's market gyrations, when the Standard & Poor's 500-stock index spiked up and down more than 4% a day for four days straight.

Yet they are also imposing a national price.

Recoveries are often led by the investing and risk-taking of the wealthy, and the rich have traditionally been more optimistic about the economy than everyday investors.

This time, surveys show the rich are among the most pessimistic about the economy. Rather than investing in stocks or companies that can create jobs, they are betting on continued volatility and slow growth by hoarding cash, gold and other safety assets.

"If the wealthy run into the proverbial bunker, then the economy will falter," said Mark Zandi, chief economist at Moody's Analytics, a division of Moody's Corp. "A loss of faith in our economy can quickly become selfreinforcing and self-fulfilling."

Not all the rich are playing it safe, of course. Spectrem Group, a Chicago-based research firm, found that a third of millionaire investors planned to add to their stock holdings in July, just before the markets faltered. Bel Air Investment Advisors in Los Angeles, like many wealth managers, encouraged its clients to increase their stock holdings to 40% from 35% earlier this year, saying that "2011 will be another year where stocks outperform bonds." And they still could. A spokesman for Bel Air didn't return calls for comment.

For now, however, the worried wealthy look like the smart money. Their caution signals a sweeping psychological shift from the mid-2000s, when many of the rich took a casino approach to rising markets. In 2008, households with $1 million or more in investible assets lost an average of 30% of their investments, and nearly one-fifth of millionaires lost more than 40%, according to Spectrem Group.

Now, the wealthy are more focused on preserving their fortunes than increasing them. Michael Sonnefeldt, the founder of Tiger 21, a New York-based investment club for multimillionaires, said that his members now hold an average of about 14% of their assets in cash, about double that of the mid-2000s.

Tiger members have an average of about 5% of their investments in gold, although some members have more than 20%.

"Our members battened down the hatches two or three years ago, and they're still battened," Mr. Sonnefeldt said. "Right now, it's easier to save a buck than make a buck. So our members have taken a lot of risk off the table."

That may have cost them in the form of lower returns in 2009 and 2010. A survey by the Institute for Private Investors found that investors with investible assets of $30 million or more earned an 11.3% return in 2010, compared with a 15% gain for the S&P 500 Index.

Tommy Gallagher, a wealthy investor and former Wall Street executive, said he was kicking himself last year as stocks rallied and his safer investments earned weak returns. He came close to putting more money into stocks, but "luckily avoided the temptation."

"It was making me crazy all year," he says. "Who wants to be the schmuck at the party who's not making any money while everyone else is making money."

Gregory Curtis, chairman and founder of Greycourt, a Pittsburgh-based wealth-management firm, said he and his clients never really believed in the recovery story, because it relied on a large liquidity injection by the Federal Reserve, rather than stronger economic fundamentals.

"I'm sure there were some wealthy families who were drinking the Bernanke Kool-aid and got burned," he said. "But I don't know many families in that boat."

Mr. Curtis said many clients were calling in this week to seek information. But they were calm and mostly looking for opportunities.

"There was not the panic that we heard in their voices in 2008," he said.

Deborah Midanek, a turnaround specialist and former mortgage specialist who has large investments, said she largely gave up on stocks after 2008.

She didn't lose much in the crisis, thanks to her bets on commodities. But she said it was a defining moment for her and many of her wealthy friends. She now owns farmland and real estate. More than 10% of her portfolio is in cash, "which is huge for me."

"After 2008, I realized that I know absolutely nothing about the equity markets," she said. "I think people like me just said, 'Who cares about the stock market. I'm going to invest in something I understand.' "

She adds, however, that stock prices fell so much Monday that she couldn't resist buying shares. "I bought stock in just one company. I sit on their board, so I understand it," she said.