NEW YORK (MONEY Magazine) -
Pick up the financial pages or tune in to CNBC and you would swear that Wall Street's bright lights think that the way to make money is to ignore the stock market and instead flip real estate, exploit high oil prices and trade currencies.
But if you start asking smart investment professionals what they do with their own money, you'll get some unexpected answers. We know, because we asked. Here are five of the most surprising, and enlightening, secrets we learned.
Secret No. 1: I don't try to beat the market
The Pro: Henry Blodget, onetime Internet stock seer
"I invest the way I think most small investors should invest: via top-down asset allocation, using mostly low-cost index funds."
That's not shocking advice. But what may be surprising is that it comes from former Merrill Lynch Internet analyst Blodget, whose bullish forecasts for Amazon.com and other stocks helped fuel the stock-picking mania of the tech and Internet bubble.
Blodget -- now barred from the securities industry, partly for publishing positive research on a company he privately disparaged -- is as dissatisfied with picking stocks as you may be with your old dot-com holdings.
"In the past few years," he writes in an e-mail, "I have studied the academic research about active management (stock picking) and have been startled and depressed by the extent to which this hurts rather than helps investors (even professionals)."
Still, Blodget, 39 and now a financial journalist, can't completely shake the stock-picking habit. "I keep a fraction of the portfolio in a few multiyear holdings (mostly Internet)," he says, "but I regard this as a personal foible rather than a serious attempt to beat the market."
Secret No. 2: I get professional help
The Pro: Alexandra Lebenthal, municipal bond guru
The president of Lebenthal is a third-generation veteran of the bond industry. Her husband, Jay Diamond, is a REIT executive. But when Lebenthal got a windfall from selling the family business in 2001, the couple decided that they shouldn't invest the money themselves.
"My husband and I realized this was a pool of money we wanted to do the right thing with," says Lebenthal, 41. "We both said, 'We don't want to mess this up by investing in a lot of things willy-nilly, without all the pieces tying together.' " Lebenthal turned to her brother Jim, an equity portfolio manager, for help.
Chances are you don't have a brother in the business, and your net worth is a little shy of Lebenthal's, but the lesson holds: As your portfolio grows and you start planning for the long haul, getting a little advice can be a smart move.
You don't need to make a major commitment to get started. Big fund companies are trotting out new advice services for their customers, and many financial planners charge hourly rates for one-time advice or periodic guidance.
Secret No. 3: I act like I'm a child
The Pro: Gus Sauter, Vanguard
How much of your money should you put at risk in the stock market? A Vanguard life-cycle fund targeted for 2015 retirees has about a 50 percent stock-50 percent bond allocation, and its fund for 2025 retirees has about 60 percent of assets in stocks.
But the 51-year-old Sauter, Vanguard's chief investment officer, is more aggressive. He has 82 percent of his portfolio in stock funds.
"A lot of people become conservative a bit early," he says. "With life expectancy increasing, I expect to live quite a while. And my money needs to be growing in the asset class that I expect to have the greatest return."
Secret No. 4: I don't care if I have a bad year
The Pro: Russ Kinnel, Morningstar
Advertisements for mutual funds trumpet their one- and three-year performance records as tallied by Morningstar.
But Kinnel, the company's director of fund research, says he barely pays attention to those numbers when investing. Instead, Kinnel focuses on whether a manager maintains a consistent investment strategy and the company behind him has a history of sound stewardship.
"They should have a good track record of doing what's right for fund holders," says Kinnel. And he'd rather know how a fund has done over a decade than how it's done during the past year. "The long term tells you more about skill," says Kinnel, 39. "The shorter term tells you more about the current market environment."
One way to find the right funds: Select from the MONEY 50 list, which screens for low expenses and management integrity (a characteristic that includes closing funds when their size can hamper their investing strategy).
And, says Kinnel, you can learn a lot from a fund's public communications. Do managers offer up excuses for a bad year or do they instead discuss lessons they have learned?
Secret No. 5: I avoid paying taxes
The Pro: Rob Arnott, money manager and investing theorist
Arnott, the editor of the Financial Analysts Journal and chairman of Research Affiliates, which manages $10 billion in assets, used to overpay the tax man. Today he focuses on investments with favorable tax treatment, such as timber, futures, certain derivatives, and tax-conscious mutual and hedge funds.
Arnott, 51, traces his tax sensitivity to a late-1980s assessment of his investing record, when he found that he beat the S&P 500 index, on average, by five percentage points on a pretax basis -- but by a mere single point on an after-tax basis.
"That's a lot of aggravation for an incremental 1 percent," he says.
A later study he co-authored found that, on an after-tax basis, most mutual funds lagged the S&P. All the trading the typical fund does leads to heavy capital-gains liabilities.
"That's a pretty damning indictment of the way taxable money is managed," he says.
You can forget about timber and derivatives, but you can learn about a fund's after-tax returns in the "tax analysis" section of its listing on Morningstar.com. You can also favor index funds, which have a smaller tax bite because they do little trading. And when looking at yield-producing securities, remember that dividends (other than those from REITs) are usually taxed at a lower rate than interest payments.
Don't try this at home
Just because you're a fan of Jeff Gordon doesn't mean you should drive your daughter to school at 135 mph. Some pros take gambles that just don't make sense for the rest of us.
Making only one bet Robert Zagunis of Jensen Investment Management has all his money in the Jensen Portfolio large-cap growth fund and in individual large-cap growth stocks. Ariel Capital Management's John Rogers (like Zagunis, a MONEY 50 fund manager) has 75 percent of his money in the small- and mid-cap value funds that Ariel runs.
"I kind of want people to know their portfolio manager is a true believer," says Rogers.
That shows admirable commitment, but it's too much risk for the average investor to take.
Gorging on company stock Charlie Ober, manager of the T. Rowe Price New Era Fund (a MONEY 50 selection), has 65 percent of his assets in the stock of his employer.
"I've worked here for 25 years," says Ober. "I have a lot of faith in management, in being in a pretty good industry."
Nothing against T. Rowe Price, a fine caretaker of fund holder assets, but many folks at Enron and WorldCom had faith in their bosses too.
Most planners would tell you to have no more than 10 percent of your assets in company stock.
Overdoing it over there Vanguard's Gus Sauter has nearly 30 percent of his stock holdings in international index funds. That's good.
But two-thirds of that money is in emerging markets. That's risky, and Sauter knows it.
But he's comfortable taking a big chance on emerging markets because he thinks their rapid growth makes them a great opportunity.
"If you're not willing to have a tremendous amount of volatility," he says, "you should think again before investing in emerging markets."