Has real estate ever been the path to wealth?

I am clearly playing Monday morning quarterback but I stumbled upon something this weekend which seems to counter the saying that you become wealthy through real estate. Merrill Lynch and Capgemini have been publishing Annual Wealth Reports for 12 years which track what the high net worth individuals (individuals with net worth over $1 million EXCLUDING principal residence and consumables) and ultra-high net worth individuals (individuals with net worth over $3 million EXCLUDING principal residence and consumables) made their money, where they move their money and how they plan succession. If nothing else, it is an interesting study on the asset allocation, sources of wealth and investment patterns.

A couple of interesting statistics:

1. In a study dated November 30, 2007 (i.e. which captures the peak of the real estate market and the beginning of the long march down circa August 2007), real estate allocation among the rich peaked at 24% of portfolios.
2. In a separate report reviewing 2006 trends, the authors indicated that the preferred channel of real estate investments was real-estate investment trusts (REIT) rather than physically buying land.

In other words, real estate has never reached more than 25% of an average rich person’s portfolio and the preferred real estate of choice is actually a stock and not land. I do find it interesting though that real estate and “alternative investments” appear to be negative correlated. As real estate allocation goes up, alternative investments go down.

The primary source of wealth creation for high net worth and ultra high net worth individuals continues to be entrepreneurship (although I cannot tell if this class indicates people who own and operate real estate development companies).

If nothing else, the study remains us that wealth is created through appropriate asset allocation and not putting too many eggs in one basket.

If nothing else, borrow the book (don’t buy it, the data is out of date as soon as its published) Wealth: How’s the World’s Net High-Worth Grow, Sustain and Manage their Fortunes as a lesson on how the other side manage their money.

As a programming note, this blog hits the summer break for the next two weeks: this will be very light posting this week and then I am taking next week off.