Finance Strategies

What do the wealthy invest in? February 18, 2008

Posted by shaferfinancial in Uncategorized.

The title to this post is a little off in that most times people invest in things in order to get wealthy.  Either way you look at it, there is much research on this subject.  Funny thing, it is not primarily mutual funds or even individual stocks that make up the portfolios of the wealthy.

First, lets define wealthy.  There are three generally agreed upon categories.  The mass affluent which has a net worth outside of their primary home of $100,000- $999,999.  The wealthy which has a net worth outside of their primary home of $1,000,000- $9,999,999.  And the super wealthy which has a net worth outside of their primary home above $10,000,000.

Interestingly, the investment strategy is basically the same between the wealthy and the super wealthy. And the higher you go in net worth for the mass affluent the more they look like the other two classes.

So how do they invest?  What financial instruments do they use?  Well, the truth is they use all sorts of financial instruments, but there are two main strategies which set them apart from those that have less than them.

First, is real estate.  The largest categories of investments for the wealthy are real estate and it only gets larger as you go up the wealth ladder.  Of course they all own a primary home.  But a second home is the next largest category of real estate investment.  And as you go up the scale they own 3,4 or more homes.  Next category is income producing real estate.  The wealthy own apartment buildings, commercial buildings, duplexes, etc. that will produce income for multiple generations.  REITs (real estate investment trusts) are favored by the wealthy. Raw land is bought and sat on until the investment blooms.

The next largest category is businesses. Usually they control or own large blocks of a business that can be best called creative or niche businesses.  The wealthy have been able to identify unique ways to satisfy needs.  Many times the discovery has come out of a industry that they worked in for years, first as a employee.

They also own some of the traditional investment classes like stocks, bonds, mutual funds.  However, it is at much smaller percentages than the non-wealthy.  For example, the super wealthy own individual stock and mutual funds, but the median ownership is around $1,000,000 for individual stocks and $500,000 for mutual funds.  Now remember, the super wealthy category starts at $10,000,000.  So their stock ownership percentage is very small compared to their overall assets.  They own cash value life insurance at about the same percentages as their stock ownership.

Their overall strategies suggest an understanding of the tax laws, so that they legally avoid high outlays to government.  It also tells us they understand history.  The greatest investments, those that last for generations until someone forgets why they were purcashed in the first place, are income producing real estate.  Imagine if your great grandfather purchased apartment buildings in Manhattan or Miami Beach or Chicago.  What would they be worth now?  How much income might they be producing for you?  The truth is, businesses come and go and our needs change, but we always need a place to live or a place to shop.

Maybe you are not the landlord type, like me.  The thought of having  renters calling me all hours of the day and night to have the plumbing fixed is my nightmare.  But there are many ways to own real estate that dont have that nightmare.

Think about starting a business that fills a niche.  Think about investing in real estate.  If you can find success in these two areas, then you are likely to join the wealthy or even the super wealthy!