How and where do the Rich really invest?
First things first - How do the rich get rich?
When you think rich, names like Elon Musk, Jeff Bezos or even Mukesh Ambani might come to mind. There are more obviously. According to Forbes, these are the top 10 richest people in the world as of 2023:
You may wonder how these people got rich.
- Bernard Arnault is the founder, chairman, and chief executive officer of LVMH Moët Hennessy Louis Vuitton, the world's largest luxury goods company. The French business magnate provides high society with Louis Vuitton luggage, Christian Dior Couture, Tiffany jewellery and Dom Pérignon champagne. While he did come from a family of some wealth, most of his wealth was created through his business.
- Elon Musk, the famed American businessman, made smart investments that shot him up to be one of the wealthiest people in the world. In his own words, he “owns 20% of a company (Tesla) that became very valuable.” His other investments such as Space X and Boring Company have also contributed significantly to his wealth.
- Warren Buffet got rich by managing other people's money, yes he knew how to generate profits on a large corpus, but his own wealth initially came from profit share and fees he charged to manage that money. In other words, he was into the business of managing money.
- India’s richest man, Mukesh Ambani’s story, is not a revelation to many. His father, Dhirubhai Ambani, already had the thriving Reliance Industries that did well. Mukesh took control of its reins and catapulted the company to further success. Ambani owns about 45% stake in Reliance Industries, where much of his wealth comes from.
In all of this, the only silver lining is that most of them are self-made, so there is hope. All of them got wealthy by owning and running businesses. The thing with owning a business is its ability to scale and make you wealthy.
Like it or not, it was not investing their own money that made them rich, there are limits to how much you can grow your money.
Once rich - What do the ultra-wealthy aim for?
The ultra-rich have a range of investment goals that they pursue to preserve and grow their wealth. Some of the most common ones are:
- Wealth Preservation
One of the primary goals of the ultra-rich, be it self-made millionaires or those who have inherited it, is to preserve their wealth over the long term. They often have significant wealth and want to ensure that their assets are protected from inflation, economic downturns, and other risks. To achieve this goal, they often invest in diverse assets with good risk-return ratios.
2. Growing Wealth
The super-rich doesn’t just want to preserve wealth – they want to make more of it. Apart from active ways of making money, they also turn to passive investing. They are constantly looking for new investment opportunities that can give them high returns. They often invest some part of their wealth into high-risk assets such as stocks, venture capital, and private equity. These investments have the potential to generate significant returns.
3. Tax Optimisation
Since the rich make a lot of money every year, like everyone, they look to minimise their tax burden. They often use complex investment strategies, such as offshore accounts, trusts, and other legal structures, to reduce their tax liability. By minimising their tax burden, they can increase their overall returns.
Finally, many ultra-rich individuals have a desire to give back to their communities and support charitable causes. They often use their wealth to make significant philanthropic contributions. They may also invest in socially responsible companies or impact investments that align with their values, generating returns while doing good for society.
How do the rich manage their wealth?
The ultra-rich often use a combination of investment strategies to increase their wealth, including diversification, real estate investments, private equity investments, stocks and ETFs, and hedge funds. If you want to emulate these tactics and learn how to invest money wisely, here’s a rundown:
Diversification is the practice of investing in a variety of different assets to spread out risk. This can include stocks, bonds, real estate, and more. The advantage of diversification is that it can reduce risk and volatility in a portfolio, as losses in one area may be offset by gains in another. However, the downside of diversification is that it may also limit potential gains if one asset class is performing exceptionally well. Despite its pitfall, investors like Warren Buffett and George Soros swear by diversification.
- Real estate investments
Real estate is a popular investment among the ultra-rich because it has the potential for both income and appreciation. The advantage of real estate investing is that it can provide a steady stream of rental income and long-term asset value appreciation. However, the downside of real estate investing is that it can be illiquid and requires significant upfront capital.
- Private equity investments
Private equity involves investing in privately held companies that are not publicly traded. The advantage of private equity investing is that it can provide high returns, as private companies often have higher growth potential than public companies. However, the downside is that these investments are often highly illiquid and may require significant due diligence and expertise to identify profitable opportunities.
4. Stocks and ETFs
Stocks and ETFs are popular investments among both the ultra-rich and individual investors. The advantage of investing in stocks and ETFs is that they offer high liquidity, meaning they can be bought and sold easily, and they offer the potential for significant returns over the long term. However, the downside is that they can be highly volatile and subject to market fluctuations.
5. Hedge funds
Hedge funds are a type of investment fund that uses complex investment strategies to generate high returns. The advantage of investing in hedge funds is that they offer the potential for high returns, often regardless of market conditions. However, the downside is that hedge funds are typically only available to accredited investors, and they may charge high fees and carry significant risks.
5. Family Offices
Typically the ultrawealthy have a team of analysts and fund managers to help them manage their wealth, in a personalized way. Even if they choose to invest in the above venues, be it in hedge funds and stocks and real estate. You don't expect them to either have the time or the energy to manage a multitude of investment avenues, they are better off outsourcing it to professionals.
Most ultra-rich are self-made.
All of them have made their money by owning businesses.
Once they gain wealth they all focus more on wealth preservation, a bit on growth, and smart tax planning. They can afford the best money managers to advise them.
In some cases, most of their wealth is also tied to their businesses and not to public markets.
If you are aspiring to get rich, you have the answers, and if you are looking to invest in the public markets, there is very little to learn from the rich.
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