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The Secret to How the Rich Stay Rich

A recent survey of more than 2,000 people with an average wealth of $7.6 million across 17 countries reveals interesting detail on how the rich stay rich.

Like most people in the stock market, I’ve always looked to stocks and investing as the way to build wealth.

You work hard, sacrifice to invest your money and someday you get to enjoy the rewards with financial independence…right?

Turns out, that’s not really how it’s done.

A recent study of 2,523 people around the world with an average net worth of $7.6 million offers a different perspective on how the rich stay rich and where they put their money.

Research firm Scorpio Partnership and BNP Wealth Management surveyed the millionaires in 17 countries about where they invest their fortunes. Not only was the breakdown of how the rich stay rich interesting but the differences across the globe also took me by surprise.

Some quick takeaways from the survey:

  • The rich didn’t get that way from investing in stocks. They have less than one in every five dollars in the stock market.
  • Rich people actually keep more money in ‘safe investments’ like bonds and even cash compared to stocks.
how rich stay rich

How the rich stay rich

Taking the big risks to make the big money

Almost two-thirds (60%) of the rich came from families that had started their own businesses and investing in their own business was the biggest account for most groups. Don’t get discouraged if you weren’t born with the proverbial silver spoon, four out of ten of the respondents found a way to make it on their own.

On average, people reported starting between four and five businesses. There’s no information given on why the rich are regular business-creators, whether they go through a few failures or if they just run multiple companies.

I have worked for and talked with enough wealthy people to know that it is a little of both and there are two reasons why that’s very important.

First, few people have their best ideas immediately. Success isn’t about getting lucky with the first idea or business you have – that’s called winning the lottery. The real business success stories are evolved through many different forms and failures.

Having multiple streams of income is extremely important to having real wealth. Ask any entrepreneur that’s put everything in just one idea. You might get rich on the idea but all it takes is one competitor to put you out of business and back in the poorhouse. Having multiple streams of income means you can lose one and still live well.

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The average age when the rich started their own business was 32 years old though other surveys show that the average age of new entrepreneurs is decreasing. The fact that the average age for starting a business is decreasing shouldn’t be surprising with the advent of technology and role models like Mark Zuckerberg showing that entrepreneurship knows no minimum age.

The rich are also heavily invested in alternative investments like real estate compared to the average investor. No other investment has created as much family wealth as property and it’s a great source of cash flow the rich can use to fund other projects.

For most investors, directly investing in real estate is out of reach. It costs tens of thousands just to buy one rental property and management can be a full-time job.

The new opportunity in real estate crowdfunding investments can be a great starting point for new investors. Instead of having to manage your own properties, something that can be a full-time job itself, you can invest in multiple projects alongside professional developers.

Real estate developers and other investors offer their projects on real estate crowdfunding sites. The platforms have analysts that verify the properties and the developer’s history with only about 5% of submitted deals making it in front of investors. Investors can then pick which deals in which they want to invest, usually as little as $1,000 per deal.

I follow several real estate platforms to get access to as many deals as possible. It costs nothing extra to have an account on more than one crowdfunding site and you’ll be able to invest in more deals.

stREITwise is a unique real estate crowdfunding platform I’ve been following that is a new twist on REIT investing. Many of the crowdfunding sites are still only open to wealthy investors but the stREITwise real estate fund is open to everyone.

The stREITwise 1st stREIT Office REIT invests in high-quality office properties and as of the date of this video, has paid a 10% annualized dividend. The fund is managed by seasoned real estate professionals that have acquired or managed over $5.4 billion in property and across all property types.

Check out the 1st stREIT Office REIT on stREITwise

PeerStreet offers investment in real estate debt on commercial property. Since the debt is back by the property, it’s much safer than equity investment but still targets returns between 8% and 12% on an annual basis. I use PeerStreet to balance out the risk in my equity investments on other platforms.

Stocks are no get-rich-quick scheme

how the rich stay rich coverProbably the most interesting part of the survey is the amount rich people have set aside in stocks, or the lack thereof. The respondents to the survey reported only having 17% of their wealth in stocks, even lower than the amount set aside in cash.

If you think about it, there are a couple of good reasons for the fact that the rich tend to put less in stocks. First, they are already taking quite a bit of risk with their own businesses and investments in other start-ups.

Because of the high risk in entrepreneurship, they put money in safer bonds and even hold it in cash to balance out the overall risk in their wealth. If their business suffers a bad year or goes bankrupt, they will still have money left in safe investments without having to worry about a stock market crash wiping them out.

Another reason why stocks may not be the reason the rich stay rich, is because stocks do not necessarily offer the returns most people imagine.

I have been a investment analyst long enough to know that few have a real genius for picking stocks and most are going to see, at best, the average annual return of around 7% over their lifetime. That’s enough to build an excellent nest egg but not the kind of get-rich-quick scheme a lot of people look for in stocks.

Putting most of your money in stocks and expecting to get rich is why individual investors see average returns well below the market average. Investors rush into high-risk, high-return stocks and then make poor decisions when the market surges or when it crashes. A study by research firm DALBAR showed that stock investors typically saw annual returns 3% to 4% below the market average because of panic selling and buying at market tops.

The American wealthy tends to favor stocks more than other groups, putting nearly twice as much of their money in stocks as the Chinese. I would think some of this is due to the maturity and popularity of the U.S. stock exchanges compared to other markets but the Europeans do not seem to favor their long-standing markets either.

step by step dividend investingWhile stocks aren’t a get-rich-quick scheme, they are an important part of your overall financial plan. You can’t expect to reach your financial goals without making your money work for you. I put my decade of experience as an investment analyst into a series of step-by-step books on investing that include everything you need to get started.

By far, my favorite is Step-by-Step Dividend Investing – a simple guide to show you how to make money on dividend stocks and other income investments. I love getting paid to invest in stocks and dividend-paying companies consistently beat the rest of the stock market.

Tolerance for risk and high rewards Make the Rich Richer

The rich put nearly as much in alternative investments, i.e. private equity and hedge funds, and in start-up financing as they did in stocks.

While Americans invest just as much in their own business as others, they don’t invest in alternative investments or in other start-up businesses with as much zeal. Just under 12% of the American rich stay rich by putting their money in these alternative groups compared to nearly 20% of European and Middle Eastern wealth committed to the groups.

Until the government passes Title III of the JOBS Act, regular investors remain locked out of these types of investments. According to regulation by the Securities & Exchange Commission (SEC), you have to be an accredited investor with a net wealth of $1 million or more or meet income requirements to invest in certain investment vehicles. Evidently, the government thinks that being rich also gives you special insight into investing.

One alternative investment idea has already been opened to regular investors. Peer lending is the intersection of social networking and lending. Borrowers go online through one of the two lending websites, Prosper or Lending Club, to fill out a loan application. Investors go to the sites and invest from $25 and up in loans that meet their criteria.

The lending platforms verify borrower credit and other information and collect monthly payments. Loan payments are passed through to investors with returns generally ranging from 6% to 14% for different investing strategies. My interview with a long-time investor in peer lending talks about some of the most important p2p investing criteria.

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Investing in bank loans is nothing new for investors, it just hasn’t been done by directly connecting investors with borrowers. While investing in the highest-risk loans might be considered too risky for most, many of the loans on the sites are very safe and will provide a stable monthly income. Check out my peer lending sites review posted on the blog for more information.

From Bill Gates to Humble Robert Gillam, How the Rich Made their Money

Bill Gates remains America’s richest man with a fortune of nearly $89 billion while “poor” Robert Gillam of Alaska brings up the rear with a net worth of just $320 million.

Harry Stine makes it on the list for my home-state of Iowa with his $3.4 billion made in agriculture. Being dyslexic and mildly autistic didn’t stop this farm boy from making billions on plant genetics and seed patents.

Ten of the people on the list inherited nearly all their money, growing it marginally on investments but not through their own corporate know-how. I’m always a little skeptical when magazines like Forbes talk about self-made million- or billionaires starting from scratch. More often than not, these self-made titans started with a pretty shiny silver spoon.

While Charles Koch’s $42.7 billion fortune is attributed to “diversified” on the broad range of industries touched by the Koch empire, it didn’t hurt that Father Fred Koch amassed $2.3 billion from the company he started in 1927. The four brothers fought a legal battle against each other for the inheritance with Charles and David winning the lion’s share.

While the Koch brothers have used their headstart to become even more wealthy, there are others on the list that seem to enjoy the life of ease. Maybe it’s just jealousy but I don’t consider the three Walton heirs on the list (Arkansas, Texas and Wyoming) to be rich…just very, very lucky.

So what are the key lessons we can learn from this survey of the Ritchie Rich and Scrooge McDucks around the world?

  • One size does not fit all even for a model of how the rich stay rich around the world.
  • Stocks may not be the answer if you are trying to become rich but still offer a good opportunity at decent returns and diversification
  • Invest in your own business ideas or the ideas of others. High returns usually mean you have to take on higher risks.
  • Alternative investments like crowdfunding and peer lending could go a long way to opening up the favorite investments of the rich

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Comments

  1. I wouldn’t have thought they’d have so little in stocks. Maybe it’s relative. Since they’re pouring their money back into their businesses. Since most millionaires, like you’ve pointed out, have businesses. But even then, still surprising they have so little in equities. And so much in bonds. Thanks for sharing!

    • I was surprised too Tim. I guess it’s because they figure they can make more on their own business than in stocks. Holding more in cash gives the rich a safety cushion in case their business doesn’t do so well.

  2. I figure if you own a business you would max out a Sole 401(k) or SEP IRA. Why not? If you have the funds you come up ahead or you lose what you could afford to. I think it is a little dangerous to have so much of your wealth tied to your business because if the business ever gets into trouble, then you could be up a creek without a paddle.

    Thanks,
    Miriam

    • That’s right Miriam. It’s why the wealthy have much of their liquid wealth in safer assets like bonds rather than stocks. They have a lot of risk in their own businesses so want less risk in other assets. I use a SEP IRA and always max out my contributions each year.

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