There are many reasons to follow the investment patterns of the wealthy. The above statistics showcase that real estate is a popular choice amongst millionaires, which could indicate that other high net worth individuals may also be attracted to this opportunity. But unless you’re able to invest in commercial and/or residential property, what else can you do if you want to start investing like a millionaire?
Taking the time to learn about stocks can really pay off. There are many aspiring entrepreneurs who have learned how to invest money in the stock market and have taken advantage of it for their own benefit. You can find out how they did it here.
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.
S&P 500 ETFs
An S&P 500 exchange-traded fund (ETF) is a collection of stocks that track the S&P 500 index. The S&P 500 includes stocks from 500 of the largest and strongest companies in the U.S., and S&P 500 ETFs include the same stocks as the index itself.
S&P 500 ETFs are relatively safe investments because they’re designed to follow the market as a whole. While the stock market will experience corrections and crashes, it has historically always recovered. That means that although S&P 500 ETFs will have their ups and downs, they’re very likely to earn positive returns over the long run.
It’s also possible to make a lot of money with S&P 500 ETFs. Since its inception, the S&P 500 has earned an average return of around 10% per year. In other words, despite its short-term volatility, its long-term returns have averaged out to around 10% per year.
If you were to invest, say, $400 per month while earning a 10% average annual return, you’d have around $1.3 million after 35 years. While it takes time to become a millionaire, S&P 500 ETFs are hands-off investments. All you need to do is invest consistently and then sit back and watch your money grow.
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.
Dividend funds
Dividend stocks are investments that pay you just for owning them. Each quarter or year, you’ll receive a small dividend payment for each share you own.
A dividend fund is a group of dividend stocks bundled together into a single investment. By investing in a dividend fund, you don’t need to worry about buying individual stocks if that’s not something you’re interested in. Dividend payments vary by stock, but you’ll generally earn a couple of dollars per share in dividends. While that might not sound like much, it can add up to more than you think.
With most dividend funds, you have the option to reinvest your dividends to buy more shares. The more shares you own, the more you’ll receive in dividends. Over time, you could potentially build a passive income stream earning thousands of dollars per year in dividend payments.
That passive income is on top of whatever returns you earn on the investments themselves, too. Say, for instance, your investments are earning a modest 8% annual return, on average. If you invested $500 per month, you’d be a millionaire within around 35 years — plus you’d be earning passive income from your dividend payments.
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.
Individual stocks
If you enjoy researching different companies and taking a hands-on approach to investing, individual stocks could be a good fit for you. By investing in individual stocks, you can create a fully customized portfolio built to fit your needs.
While investing in individual stocks does require more research than investing in S&P 500 ETFs or dividend funds, you have a better chance of beating the market and earning higher-than-average returns.
If you do choose to invest in individual stocks, aim to buy stocks in at least 10 to 15 different industries. This will help diversify your portfolio and limit your risk. Also, do your research when choosing stocks, because the wrong investments could wreak havoc on your finances.
Investing in the stock market can be daunting, but it can also put you on the path to becoming a millionaire. By choosing your investments wisely and investing consistently, you can earn more than you might think.
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.
Conclusion
There are more millionaires in the world than ever before, and all of them have made it through a variety of different routes. Some of these people grew up with money, others had to work really hard for it, while others used their intelligence to become wealthy. You too can do same.