Every year Forbes releases a survey on the investment portfolio of the ultra rich and the data is very telling (and eye opening). So, what do millionaires and billionaires do differently than the rest of us? It turns out that they invest in such assets as private and commercial real estate, land, gold, and even artwork. You can find some great information on what other assets the rich invest in here.
The ultra-wealthy generally aren’t flashy. They lead a simple lifestyle when it comes to spending their money, and the vast majority of them, in fact, live below their means. Lets see what they do with their money to become millionaires in the first place.
Cash and Cash Equivalents
Many, and perhaps most, millionaires are frugal. If they spent their money, they would not have any to increase wealth. They spend on necessities and some luxuries, but they save and expect their entire families to do the same. Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. They establish an emergency account before ever starting to invest. Millionaires bank differently than the rest of us. Any bank accounts they have are handled by a private banker who probably also manages their wealth. There is no standing in line at the teller’s window.
Studies indicate that millionaires may have, on average, as much as 25% of their money in cash. This is to offset any market downturns and to have cash available as insurance for their portfolio. Cash equivalents, financial instruments that are almost as liquid as cash. are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills.
Some millionaires keep their cash in Treasury bills that they keep rolling over and reinvesting. They liquidate them when they need the cash. Treasury bills are short-term notes issued by the U.S government to raise money. Treasury bills are usually purchased at a discount. When you sell them, the difference between the face value and selling price is your profit. Warren Buffett, CEO of Berkshire Hathaway, has a portfolio full of money market accounts and Treasury bills.
Millionaires also have zero-balance accounts with private banks. They leave their money in cash and cash equivalents and they write checks on their zero-balance account. At the end of the business day, the private bank, as custodian of their various accounts, sells off enough liquid assets to settle up for that day. Millionaires don’t worry about FDIC insurance. Their money is held in their name and not the name of the custodial private bank.
Other millionaires have safe deposit boxes full of cash denominated in many different currencies. These safe deposit boxes are located all over the world and each currency is held in a country where transactions are conducted using that currency.
Real Estate
For more than 200 years, investing in real estate has been the most popular investment for millionaires to keep their money. During all these years, real estate investments have been the primary way millionaires have had of making and keeping their wealth. The trend started with buying a primary home and then other residences, usually for tenants. After buying some personal real estate, then they have started buying commercial real estate like office buildings, hotels, stadiums, bridges and more.
Millionaires often have large real estate portfolios. Once they have established themselves as a buyer in the real estate market, real estate agents start bringing them deals and they find it easy to obtain financing. Large investors have many millions tied up in real estate. Real estate is not an investment to depend on for cash, but it is a lucrative investment in the long run and a tried and true investment for millionaires because they like passive income and find that real estate provides it.
Stocks and Stock Funds
Some millionaires are all about simplicity. They invest in index funds and dividend-paying stocks. They like the passive income from equity securities just like they like the passive rental income that real estate provides. They simply don’t want to use their time managing investments.
Ultra-rich investors may hold a controlling interest in one or more major companies. But, many millionaires hold a portfolio of only a few equity securities. Many may hold index funds since they earn decent returns and you don’t have to spend time managing them. They also have low management fees and excellent diversification. Millionaires also like dividend-paying stocks for the passive income they provide. Of course, they are also interested in capital appreciation but, for some, that’s less of a concern than generating current income.
Private Equity and Hedge Funds
Unless you are a multimillionaire, you may not participate in a hedge fund or buy into a private equity fund. Public equity is well known since its shares trade on stock exchanges. One of its advantages is its liquidity. You can readily liquidate your public equity or shares of stock. Private equity funds, on the other hand, generally gets their investments from large organizations like universities or pension funds. Investors of private equity funds have to be accredited investors with a certain net worth, usually at least $250,000. Accredited investors can be individuals as well as organizations, but they are defined by regulations. In other areas, private equity funds do not have to conform to as many regulations as public equity does. Some of the ultra-rich, if they are accredited investors, do invest in private equity.
Hedge funds are not the same as private equity. Hedge funds use pooled funds and pursue several strategies to earn outsized returns for their investors. Hedge funds invest in whatever fund managers think will earn the highest short-term profits possible.
Commodities
Commodities, like gold, silver, mineral rights or cattle, to name a few, are also stores of value for millionaires. But they require storage and have a level of complexity that many millionaires simply don’t want to deal with.
Alternative Investments
Some millionaires, along with the ultra-rich, keep a portion of their money in other alternative investments like such tangible assets as fine art, expensive musical instruments or rare books. Also, there are millionaires and the ultra-rich that have investments in intellectual property rights such as the rights to songs or movies. These can be very lucrative investments.
Cryptocurrency
It is estimated that there are around 100,000 cryptocurrency millionaires out there with the majority holding Bitcoin. To try to make your fortune in cryptocurrency, you have to be willing to take on some risk and many millionaires don’t have an appetite for risk. You can take a small portion of a millionaire’s wealth and invest in one of the different cryptocurrencies. Plenty of people have become millionaires this way. Some have lost their money. More and more, cryptocurrency is becoming accepted as a legitimate investment that deserves a look when trying to accumulate wealth.
Only Investing in the U.S. and the EU
While developed countries such as the United States and those within the European Union are thought to offer the most investment security, UHNWIs look beyond their borders to frontier and emerging markets. Some of the top countries that the ultra-wealthy are investing in include Indonesia, Chile, and Singapore. Of course, individual investors should do their research on emerging markets, and decide whether they fit into their investment portfolios and their overall investment strategies.https://d0a10f0e50ee2aa105d7fd05c1131acf.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
Investing Only in Intangible Assets
When people think of investing and investing strategies, stocks, and bonds normally come to mind. Whether this is due to higher liquidity or a smaller price for entry, it doesn’t mean that these types of investments are always the best.https://d0a10f0e50ee2aa105d7fd05c1131acf.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
Instead, UHNWIs understand the value of physical assets, and they allocate their money accordingly. Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold, and even artwork. Real estate continues to be a popular asset class in their portfolios to balance out the volatility of stocks. While it’s important to invest in these physical assets, they often scare away smaller investors because of the lack of liquidity and the higher investment price point.
However, according to the ultra-wealthy, ownership in illiquid assets, especially ones that are uncorrelated with the market, is beneficial to any investment portfolio. These assets aren’t as susceptible to market swings, and they pay off over the long term. For example, Yale’s endowment fund has implemented a strategy that includes uncorrelated physical assets, and it returned an average of 10.9% per year between June 2010 and June 2020.
Cisco Systems
- Market value: $186.4 billion
- Billionaire investor: Generation Investment Management
- Percent of portfolio: 3.9%
When it comes to Cisco Systems (CSCO, $44.11), Generation Investment Management isn’t fooling around. The London-based advisory – which was co-founded by former Vice President Al Gore, who currently still serves as chairman – started a new position by purchasing more than 18 million shares of CSCO during the third quarter.
The position now accounts for 3.9% of the company’s $18.8 billion in managed securities, putting it just outside its top 10 stock picks.
Although the technology conglomerate’s stock has frequently been a market laggard over the past five years, it’s having a strong Q4 so far. Since the beginning of October, CSCO shares have gained 12% to the S&P 500’s 9%.
Analysts expect the company to generate average annual earnings growth of 6.7% over the next three to five years, according to S&P Global Market Intelligence. Their average recommendation stands at Buy.
Barrick Gold
- Market value: $42.0 billion
- Billionaire investor: Platinum Investment Management
- Percent of portfolio: 4.2%
The best-known investor in Barrick Gold (GOLD, $23.61) at the moment is probably Warren Buffett’s Berkshire Hathaway. The Oracle of Omaha initiated a position in the gold and copper miner in the second quarter of 2020, buying 20,918,701 shares worth $563.6 million.
The move had Buffett-watchers scratching their heads. After all, Warren Buffett is the farthest thing from a gold bug. Be that as it may, at least miners produce cash flow. In the case of Barrick, it even pays a small dividend.
Despite what its name might indicate, Sydney, Australia-based hedge fund Platinum Investment Management (AUM $16.2 billion) isn’t exactly big on commodities, either. But they do allocate a notable portion of their portfolio (4.2%) to Barrick Gold.
Platinum Investment, which has owned shares in GOLD since 2012, raised its stake by 81%, or 2.7 million shares, in Q3. Prior to the latest investment, Barrick accounted for just 2% of its total portfolio value.
Conclusion
Rich people don’t just live in houses, they invest in real estate. They don’t just buy investment properties, they invest in them. Why? The rich invest in real estate because its high leverage, you can control how the property will perform over time and there is always someone looking to buy it.