Have a bit of money sitting around? Wondering what to do with it? You may be asking yourself the question, “What do the rich invest in?” After all, they must be doing something right with their money if they’re so wealthy. Lucky for you, this entire article is for those that want to invest like the ultra-wealthy!
What Does It Mean to Invest?
According to Investopedia, investing is…
“…the act of allocating resources, usually money, with the expectation of generating an income or profit. You can invest in endeavors, such as using money to start a business, or in assets, such as purchasing real estate in hopes of reselling it later at a higher price.”
In other words, investing is putting money into something that will hopefully make you more money.
Why Should You Invest?
Sooo…investing is great, but what’s the point? Can’t you just save your money (like, in cash?) and live off it later? Or maybe just live off of social security?
And why do the rich invest? Are they just money hungry, always wanting more?
First off, the rich aren’t typically evil money hungry human beings. In fact, most of them are kind, level-headed, and are giving in nature. They just know that if they don’t invest their money, they’ll ultimately run out!
But why is that? Why on earth might they run out of money?
Long story short…inflation.
We already had a learning session for investing earlier in this post, why not a definition for inflation too? 🙂
“Inflation is the decline of purchasing power of a given currency over time.”
Typically, every year, the price of stuff goes up. As far as I understand it, it’s basically a planned event by the government to prompt consumers to buy more today because today’s money, if stashed away, would buy less in the future. And, this increase in spending naturally prompts economic growth.
Over the last 40 years, the price of consumer goods (ie. the inflation rate) has gone up by 3.5% per year.
This means that every 20 years or so, the cost of goods double.
So, if you stashed away 10,000 dollars under your mattress today and then pulled it out in 40 years, that $10k will no longer buy you a nice used car… Instead, you’ll probably be in the market for a nice moped instead.
But what if you invested like the rich?
But, what if you invested and earned 10% per year on that money (instead of nothing)? Then, instead of your $10,000 feeling like $2,500 in 40 years, it would feel more like $134,000!!
THAT’S why the rich invest their money! Then, instead of being able to buy virtually nothing with their money, they can live off it nicely and give in the process too!
Inflation is a killer, but if you invest like the rich, you won’t even need to waste your time thinking about it.
What Are The Easiest Ways to Invest?
If you haven’t invested before, it can be pretty overwhelming! There are tons of options out there. Some are just plain scams, others don’t return nearly what they claim, and a handful of others are actually solid investments…but the lingo around them is still intimidating!
If you’re new to investing but want to invest like the rich, there are a couple different avenues you can look into (ie. this is a sneak-peek answer to the question, “What do the rich invest in?” that we’ll get to below ;))
1) Invest in your 401k
Does your work offer a 401k program (yours may be called a 403b – essentially the same thing!)? And do they match your contributions? Bonus!
This is by far one of the easiest ways to invest your money.
- Just have your work open an account for you
- Tell them how much of your paycheck you’d like to invest
- And presto! You’re investing!
They’ll likely get you started with a Target Date Retirement Fund, and that’s totally fine for starters. If you decide later that you’d like to invest it differently, then you can move it into another fund then!
2) Invest in Vanguard Funds
Don’t have a 401k option? Then you could invest yourself! It’s really not that difficult.
- Just open an account through Vanguard (they’re the best low-cost option out there in my opinion)
- And then put your money into funds such as VOO, VOOG, and VTI (many investors recommend these)
Just read up on the investment options above and see which one is best for you!
Maybe you want to become rich with investing, but you really don’t have much money to work with. Is it still possible to get wealthy by investing?
Sure it is!
If you don’t have a bunch of money to contribute, but you want to get wealthy, you essentially have three options:
- Invest small amounts for a long period of time
- Invest a small amount into a business and grow that business into something HUGE
- Or, you can change your current circumstance and earn more, spend less, and create a bunch of excess cash to invest each month!
How to Get Rich Over a Long Period of Time
Let’s say you’re super young. Like, 20 years old.
You don’t make a ton, but you can scrape and claw and manage to invest $200 a month into your 401k or Vanguard account. And, you do this for 50 years.
Over that time, you’ve contributed $120,000 into your account…but what will your investment be worth??
If you can earn 10% a year with that investment, after 50 years your retirement account will be worth….. $3.5 million!!
Invest early and consistently, and you could be worth nearly $4 million someday. That’s awesome.
How to Get Rich With Basically No Money
Let’s say you don’t even have $200 a month to invest, but you still want to invest and get rich.
For you, I’d suggest you invest in a cheap business (like lawn mowing, plowing, blogging, etc.) and work it! There are plenty of stories out there where people started a business with $100 and they’re millionaires today.
If you work hard enough, you could start a business, build it up, and then sell it for millions someday too!
How to Get Rich By Earning More, Spending Less, and Investing Heavily
This is the route that most people take. They don’t get rich over the course of 50 years, and they don’t do it with a single business. Instead, they decide to earn more (either at their job or with a side gig), become more frugal, and then invest heavily into their 401k or through a Vanguard fund.
Instead of investing $200 for 50 years, they’re probably stashing away $1,500 a month for 30 years, which yields roughly the same results — $3.5M in retirement.
It’s a bit more of a sacrifice, but if you don’t start investing super early in life, then this is one of the best options you’re left with!
Before we dive into what the rich are investing in right now, it’s important to note what the rich are NOT investing in.
In other words, if you truly want to become wealthy and do what the wealthy do, then pay careful attention to what they’re NOT spending their money on too!
The rich do NOT invest in:
- cars that come with payments
- big houses
- short term speculative investments (like crypto)
- and they don’t invest in just one area (they diversify!)
Why The Rich Don’t Buy Expensive Cars
You might think the rich are driving around in Maseratis, Lamborghinis, and Ferraris…After all, they’re rich, right? They can buy whatever they want!
Nope, the rich know that cars plummet in value, and they’d rather not spend a large amount of their wealth into something that’s depreciating like a rock.
Instead, the studies show that 61% of the wealthy are driving around in Toyotas, Hondas, and Fords, just like the rest of us!
Last year, real estate went up in value by nearly 15%. This isn’t the typical. And it won’t be the norm long-term either.
Normally, homes appreciate at a rate of roughly 3.5% a year. And, they usually cost about 1% to maintain, which means their net growth rate is only 2.5%. Tack on top of that the inflation rate of 3.5%….annnnnd you’re actually losing money with a home “investment”.
Related: A House is a Terrible Investment
This is why the rich don’t invest big money into their houses. They’re essentially losing money over time.
Plus, the rich love to keep their money liquid (ie. easily accessible). If they tie up a huge amount of their net worth into their home, they wouldn’t have the option of investing that money into a huge unforeseen opportunity.
Still don’t believe me? Check out these stats…
- The average person has 63% of their net worth tied up in their house
- And the rich??…their house is only 9% of their overall net worth
If you want to be rich, then do what the rich do and stop putting all your money into your house!
Why The Rich Don’t Invest in Cryptocurrency
Surely the rich are making bank on cryptocurrency, right??
According to Investopedia, 71% of high net worth individuals are either uninterested in cryptocurrency or they’re still on the fence about investing.
Why don’t rich people like cryptocurrency as an investment?
There are three main reasons the wealthy aren’t investing in crypto.
- Wealth management firms are traditional and will stick with what consistently works…and has worked for decades.
- Cryptocurrency is still speculative and the values can vary wildly with just a single tweet. Rich people don’t like such volatility in their lives.
- Rich people don’t like short term investments. It’s costly (ie. it’s highly taxed) and takes up too much of their time to pay attention to.
Want to be rich? Do what the rich do and stop gambling with your money in crypto.
Why The Rich Don’t Solely Invest in Their 401k
Often times, the 401k can be a solid investment (especially if your company matches your contributions!), so you will find quite a few rich people investing here as well. But, while the average person often invests solely in their 401k, the wealthy only have a small amount of their net worth here.
The 401k is largely undiversified. In the 401k, you’re pretty much limited to buying stocks and bonds. As we’ll discover later in this article, rich people like to diversify and invest in many other alternatives.
Related: 3 Reasons I’m Not Maxing Out My 401k
How Do The Rich Get Rich?
What you need to understand about the rich is that many of them didn’t become wealthy because they made a super secret one-time investment. They obtained their wealth by working hard, earning a great yearly wage, spending only a fraction of their earnings, and investing heavily.
If they didn’t earn a decent wage early in life, they never could have built up their wealth.
The common practices of the rich:
Did you know that less than 21% of millionaires inherited their wealth? The great majority of the rich have built up their millions all by themselves.
And, they didn’t make their initial wealth with some secret investment, they built it up with blood, sweat, and good old fashion work!
So how did they really do it?
What is it about the rich that makes them magnets for money?
Most reasons are quite basic actually.
- frugal savers
- take on side hustles (start their own business)
- studiers and planners of their investments (instead of just mindlessly putting money into their 401k)
- more prone to personal growth (reading, studying, etc.)
- sleep less, work more, and therefore earn more
- think more (and make time to think more)
- interested in feedback (and don’t get offended)
How did the rich get rich? I stated it before. The rich became rich because they spent less, they decided to earn more, and they always thought and planned years in advance.
In short, the rich begin with the end in mind.
They knew what they wanted later in life, and then they worked backwards to do the things they needed to do to become rich.
An example of thinking like the rich and beginning with the end in mind:
Said another way, perhaps they targeted having $10 million for their retirement. Then, they would estimate the growth rate on their investments and factor in how much they should invest per month.
And then they went out and they fricken did it!
The math behind beginning with the end in mind
Let’s say they could grow their investments by 15% a year, and they figure they could stash away $2,000 a month by earning more and being frugal. They start this at age 25.
How many years will it take them to reach $10 million?
At this point, they simply put it into the investment calculator and find out how long it will take them to reach their goal.
In this case, it would take them 28 years to reach $10 million dollars, so they’d be 53 years old.
If that’s satisfactory, then that becomes the plan and the goal! If they want to retire sooner, then they’ve got to figure out a way to get better returns or contribute more each month!
It really is as simple as that!
Begin with the end in mind.
What Do The Rich Invest In?
So far, we explored…
- easy ways to invest
- how to invest with no money
- what the rich DON’T invest in
- how the rich get their money in the first place…
…and NOW, we can finally learn what the rich actually invest in!
Some may not surprise you, but some of these may just knock your socks off!
Based on my research and by what I know from ACTUAL millionaires, here’s what the wealthy put their money into:
- The Stock Market
- Self Directed IRA/SEP IRA
- Precious Metals
- Private Businesses
Seems pretty straight forward at first glance, right? Buuuut, when we start to unpack these, you’ll begin to see some secrets of the rich!
Didn’t we just learn that putting cash under your mattress will actually set you backwards in terms of purchasing power?
But in this case, the cash isn’t really the investment. It’s the preparation for a great investment.
Here’s an example of how cash can make a person rich:
- A friend of a friend tried investing in real estate. They decided it wasn’t for them.
- They want to sell their whole lot of houses together and just get out of the real estate game.
- There are 5 houses total. They’re collectively worth $1,000,000. He’s willing to sell them for $850,000 so he can get out quick and pay off his debts.
If you’re an average person, you look at that price tag and start to sweat. There’s just no way you could come up with that kind of money!
If you’re a rich minded person, you’ve already got $300,000 stashed away in cash. The other $550,000, you could easily get from the bank since the overall investment is worth a million.
The rich would use their cash to swoop in, buy the rental houses, immediately earn 15% on their money at the purchase, and then continue to earn 15% or more from all those rent checks!
This is where cash is king.
With cash, the rich could swoop in and buy a deal on real estate, in the stock market, with a business, and any other money-making option you can think of!
But, without cash, you’re left dead in the water…with no way to get a jump on those wealth opportunities.
Related: Why Do The Rich Hoard So Much Cash?
2) The Stock Market
People are continually wondering what stocks the rich are buying right now. It’s as if the wealthy have some sort of secret information that tells them what the hot new stock is and that they’re continually making bank on every one of their purchases.
This just simply isn’t true.
We stated earlier that most wealthy people aren’t interested in bitcoin. It turns out that rich people also don’t speculate on risky single stocks.
What stocks are millionaires buying?
So what types of stocks are millionaires buying if they’re not interested in speculative single stocks?
Before the pandemic, the ultra-rich were investing their money into the top 500 U.S. companies (think Google, Apple, Facebook, etc.). And throughout the pandemic and even today…millionaires are still investing their money into the top 500 U.S. companies.
This method worked for them for the last few decades…so why would they change course? Turns out, they thought the same way.
Do the rich invest in index funds?
So how do the rich invest in these top companies? Are they interested in index funds?
- Index funds enable them to invest in all their favorite stocks (the top 500 U.S. companies — ie. the S&P 500), all in one place
- And, index funds are one of the cheapest and easiest ways to invest
Of course they invest in index funds!!
Do the rich invest in mutual funds?
How about mutual funds? Do the rich invest in mutual funds?
Technically, index funds are mutual funds, so we can already say this is a resounding yes based on our findings above. But, what about mutual funds that are set up to invest in certain categories and sectors? Are millionaires interested in these types of investments?
Millionaires like low-cost, low-maintenance investments. If they need to move their money around often with their investment plan, they’ll likely move away from this plan after just a short period of time. The more specific and volatile the investment, the more likely they’re going to shy away from it.
So, if the mutual funds are broad in nature and have a great long-term track record, then they’ll certainly invest in those funds.
If, however, the mutual funds are up and down and require constant attention, it’s just not for them.
How do the rich invest for retirement?
Young investors are often asking questions like:
- What stocks are billionaires buying in 2021?
- What are the stocks that will make you rich in 5 years?
- Are there cheap stocks that will make you rich in 2021?
In other words, most of us are looking for the quick win so that we can bag our job, retire early, and enjoy the rest of our lives on our beach chair at the shoreline.
Millionaires don’t think this way.
They’re not thinking about the short term, they’re thinking about the long-haul.
So when you start asking questions about the top stocks that millionaires are buying, you’re starting with the completely incorrect premise.
Millionaires aren’t loading up on cheap volatile stocks for their retirement.
Instead, the wealthy are investing in stocks by purchasing S&P index funds. That’s it. It’s basic, it’s simple, and it’s perfect for the typical millionaire that likes to keep life simple.
If you or I open up an IRA through the bank, we’re limited in two ways:
- We can only invest in the products there at the bank, which often are ‘okay’ at best
- We can only invest $6,000 a year into this account ($7,000 if you’re over 50)
The rich…they like options, so they’re not going to sign up for the super-limited IRA at the bank. Instead, they’re going to open up the floodgates of possibilities and invest through their self directed IRA.
The Millionaire Investing Strategy: With the Self Directed IRA
Millionaires don’t often like to mess around with their investments all the time, but they do like choices.
In the standard IRA, you can typically only invest in stocks and bonds…and that’s pretty much it.
In a Self Directed IRA, you can invest your retirement money into:
- real estate
- horses and livestock
- water rights
- physical gold, cryptocurrencies, tax liens, private mortgages, and more!
AND, if you’re self employed (which most high net worth people are), you can do all this investing in a SEP IRA (Simplified Employee Pension). And guess what your contribution limits are?
Instead of $6,000 a year, you can put…get this…$58,000 a year into your retirement accounts (for 2021).
Want to grow your wealth? Investing $58k in a tax deferred investment is a pretty good way to do it!
The rich love to invest in real estate…and for so many reasons!
- With a proper search, they can find real estate at a discount
- The property appreciates in value over time
- The depreciation of the property lowers their income tax basis every year
- Improvements on their property are tax deductible
- It provides them with a monthly income source
- They can gift the real estate to their children and never pay taxes on that transfer!
Well dang! That’s a lot of reasons to invest in real estate! No wonder so many millionaires love to invest in property!
The next question though, is…what type of property do the wealthy buy?
How do the rich invest in real estate?
When you talk about the wealth investing in property, that can mean a ton of different things.
Property could mean…
- farm land
- parking structures
- office space
- real estate investment trusts (REITs)
- crowdfunding platforms
- single family houses
- an entire apartment complex
- or, it could even mean a trailer park (some of these are actually cash cows!)
So what type of property do the rich invest in? And then, how do they purchase these properties (with cash? heavy financing?)?
What type of property do the rich invest in?
When it comes down to it, if the property produces cash flow, appreciates in value, and is mostly passive, the rich are interested in it. So really, the rich could be interested in every bullet point listed above. But, they do seem to gravitate toward some of these more than others.
Since the rich love passive income (so they can invest, repeat, invest, repeat, invest, repeat, etc. and build up a ton of wealth with very little added time), they tend to own properties that produce the best income for the least amount of time invested.
For this reason, the rich invest in the following types of properties more often:
- office space
- parking structures
- apartment complexes (with a property manager taking care of all the details)
- and sometimes, if the headaches are low, trailer parks
Then, for those that are less wealthy (but still millionaires), they invest in:
- single family houses
People that want to be wealthy, but they aren’t quite there yet, they invest in:
- crowdfunding platforms
- and sometimes, a bit of land
Do the rich finance their real estate investments? Or do they pay cash?
I’ve always been curious about this one. Do the rich borrow money to invest in real estate? Or do they all lay down cash for every purchase?
What is the smartest way to go?
Dave Ramsey preaches that if someone wants to become rich, they should pay off all their debt, including their rentals and their home loan. Honestly, I like this tactic, but the super wealthy aren’t taking advice from Dave Ramsey apparently…
Most high net worth individuals borrow on their properties – usually upwards of 80-90% of the property value.
It’s because debt is cheap and they can likely earn far by leveraging the bank’s money vs. using up all their cash.
Let’s use a simple example here…
Let’s say a wealthy individual has $200k sitting around.
- A deal lands in their lap – 5 rental houses for $200k each
- Each rental produces $1,500 a month in income and they appreciate in value by 3% a year
- Either the wealthy individual can buy one house with cash or 5 houses by borrowing at 2.5% APR
If they buy the one property with cash, they’ll earn $1,500 a month, which equates to $18,000 in rent that first year. Plus, the property appreciates by $6,000. They earn $24,000 with their $200,000, or roughly 12%. Not bad!
If the ultra wealthy buy all 5 properties and put 20% down on each of them, they’ll use up their $200,000. They’ll earn five rental incomes of $18,000 each and the properties will likely all appreciate by 3%. In total, this equates to $120,000 in that first year. And, you’ll owe roughly $40,000 in mortgage payments. That’s a net gain of $80k vs. the $24k they’d earn by not borrowing.
This is why the ultra-wealthy borrow. Sure, there’s a bit more hassle and a bit more risk, but an extra $56k on your money each year?? That’s pretty impressive!
5) Precious Metals
Here’s the big question — “Do the rich invest in gold and silver?”
They do…but not because they think it’s a great investment. Basically, they just stash some of their investment here as a hedge against inflation and the weakening dollar.
How do the rich invest in gold and silver?
So if the rich are investing in gold and silver, how do they do it?
- Some are buying gold by the bar (or even by the ton!) from a reputable dealer
- Others like to buy ETFs that own gold (like SPDR Gold Shares (GLD), iShares Gold Trust (IAU) and Aberdeen Standard Physical Gold Shares ETF (SGOL))
- And some would rather invest in gold mining stocks or ETFs (where their value would go up with gold prices, and potentially also with ramped up production!)
What percentage of their portfolio do the rich invest in gold and silver?
Like I said, gold and silver aren’t investments that the rich expect to make bank on. It’s more of an insurance policy than anything.
For most high net worth individuals, they’ll put somewhere between 7-10% of their wealth into precious metals – and typically gold and silver.
Rich people invest in art and collectibles.
Quite a few reasons actually:
- Art is often purchased to be enjoyed. Some pieces are fascinating and bring joy to the consumer. And the same is true with collectibles!
- If you get in the market at the right time, art can be a tremendous money maker (I mean c’mon – how would you like to buy a piece for $750 and sell it for $40,000??)!
- It’s another way to diversify their investments. When you’ve got tens of millions of dollars, it’s best to spread it around in more places than just a couple!
So how do the rich invest in art?
According to Money Under 30, one of the best ways to invest in art is to just start learning about everything you can and visiting your local galleries to see what they have to offer. Then, chat with local curators since they’re usually eager to answer any questions you may have.
Once you narrow it down to the art you like, I’d recommend making an investment in a physical piece (vs. buying a share of art through an app). It’s just nicer to have something, hold it, enjoy it, and then perhaps sell it at a later date.
7) Private Businesses
And then here we are, at investment #7. Quite honestly, I saved the best for last.
When asked the question, “What do the rich invest in?”, this is where my mind goes. And this is one of those options where the ultra-rich have a leg-up on the average Joe.
Rich people are often business people, they’re people-people, and they know what’s going on in their local areas and in the world of business. More importantly, they have deep connections and even deeper pockets.
If there’s a company out there that needs some help getting their idea off the ground, they likely need some funding and a individual with a multitude of business connections (think Shark Tank here). This is where the wealthy business mogul comes in.
They listen to business pitches and if they like one, they’ll offer some money for part-ownership in the company. They can then put in as little or as much effort they want in growing the company. At this point they have a direct impact on how much money their investment will make. It’s a powerful position to be in…all because the ultra-rich have what everyone ultimately needs…money.
How can you start investing in private businesses?
Yes, there are websites and apps out there where you can become a hands-off angel investor, but I honestly wouldn’t recommend it. As with any business venture, it’s best to see the eyeballs of the owners (to gauge commitment and passion) and also get your hands on the product or service.
To get here, you’ll likely need to succeed in business yourself. And, you’re obviously going to need some money. If you’ve got both of these criteria covered, then it’s time to start networking at your local chamber of commerce, at local universities, and search for entrepreneur clubs as well.
Without connections, you’re not going to become a wealthy private investor, so it’s time to get out and meet some more people!
In short, the rich invest in what they know, they invest for the long-term, and they’ll often spread their money around so they don’t have all their eggs in one basket!
Where do the wealthy put their money? Let’s recap.
- Stock market
- Self directed IRA/SEP IRA
- Precious Metals
- Private Businesses
It’s not an overly complicated list, but it works!
What do you think? Will you start investing like the rich? What might you invest in?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.