There are some common perceptions that the rich are rich because they either inherited their money or they got lucky somewhere along the way – like winning the lottery or hitting the jackpot on that one in a million investment.
Although this may be true for some high net worth individuals, the vast majority, are rich because of the financial choices they’ve made and their approach to investing.
The rich aren’t rich by accident and here are 7 things they actively do when investing that anyone can do:
Invest For The Long-Term.
High net worth investors prefer investments with long investment windows with long lockup periods. Why? Because long-term investments offer a variety of advantages that liquid assets like public equities don’t offer.
- Long-term investments take emotion out of investing because it prevents investors from acting on their impulses. This illiquidity shields the assets from market noise and the madness of the crowds.
- Long-term investments also offer consistency, predictability, and reliability in the form of cash flow and long-term growth – all at reduced risk compared to liquid assets.
The rich build their towers of wealth one floor at a time and they do it through income-generating investments that build upon themselves layer by layer through reinvestment.
Warren Buffett said it best when he described the ideal business:
“The ideal business is one that generates very high returns on capital and can invest that capital back into the business at equally high rates.”
“Imagine a $100 million business that earns 20% in one year, reinvests the $20 million profit and in the next year earns 20% of $120 million and so forth.”
Short-term investments like stocks rely on timing to profit. Buy low, sell high. The problem is profits are unpredictable and can’t be relied upon for building long-term wealth because you never know when your portfolio is going to go forward or backward.
Timing is a game of chance the ultra-wealthy are not willing to engage in. They prefer predictability and consistency from long-term assets in the private markets – even if it means passing up on that occasional Amazon or Facebook unicorn in the public markets.
Invest In Tangible Assets.
Logically, if the ultra-wealthy prefer long-term investments, they will naturally be drawn to tangible assets like real estate, cash-flowing businesses, agriculture, and energy that produce near-term cash flow coupled with long-term growth – the building blocks for building wealth.
Invest With An Eye On Tax Benefits.
The rich live by the mantra “a penny saved is a penny earned.” Saving a dollar in taxes is just as valuable as adding a dollar in income.
That’s why the wealthy are drawn to assets like real estate, businesses, and oil & gas that provide a myriad of tax breaks, credits, and deductions that pad wealth by reducing taxes.
Passive investments in these assets are structured as partnerships pass the tax benefits through to the partner level.
Pursue Multiple Streams Of Income.
The ultra-wealthy are willing to defer to the expertise of others through passive investments if it means they can generate multiple streams of income and diversify across a variety of asset classes, geographic locations, and compensation structures, and periods.
These multiple streams of income ensure continuing cash flow even during downturns as performing assets compensate for faltering ones.
Use Good Debt.
The rich understand the power of leverage. By using good debt to acquire real estate, buy business equipment, or expand farming operations, the wealthy can leverage debt to increase income and long-term appreciation by expanding their income-producing holdings.
The wealthy know how to compensate for the cost of credit with productive acquisitions that more than make up for the interest expense.
Keep Your Powder Dry.
Have cash on hand to pounce on opportunities. The rich always keep cash on hand to take advantage of opportunities that come their way.
Alternative private investments – of the type the wealthy prefer – have limited investment windows that typically require immediate action, which the rich are always prepared for. But don’t assume that keep cash idle long as they constantly seek to reallocate cash from expiring investments to new ones.
Combine Charitable And Social Causes Through Impact Investments.
The rich are increasingly combining their concern for the environment and other social causes with investing.
Two of the main investment objectives for many high net worth investors are:
- To create generational wealth.
- To give back.
Now that many impact investment opportunities are crossing over into profitability, ultra-wealthy investors are increasingly drawn to them for obvious reasons.
Most high net worth investors are self-made and they did it through creating multiple streams of passive income from cash flowing tangible assets with long-term holds that also deliver growth along with substantial tax benefits.
That is how the rich invest in a nutshell and that’s how anybody can invest to achieve the type of financial freedom they enjoy.
