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.
Disclaimer…I feel a little like a hypocrite here because I DID get rich investing but it was through venture capital investments and working on Wall Street. Soooo, you can get rich investing in stocks and the wealthy still make lots of money in the market, it’s just not like most people think.
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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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What’s the Average Age when Someone Gets Rich?
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.
Stocks are no get-rich-quick scheme
Probably 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 an 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.
While 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.
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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.
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.
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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 richSave
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.