Rich People's Investment Strategies

Ultra-high-net-worth individuals (UHNWIs) are defined as those with a net worth of at least $30 million. There are a number of common investments that the ultra-wealthy make, including real estate, stocks, private equity, and alternative investments such as fine art, cars, and intellectual property rights.

UHNWIs tend to understand the basics of having their money work for them and know how to take calculated risks. They also tend to diversify their investments, allocating their wealth across a range of different assets.

Real estate

Passive Income

The primary attraction of real estate investment is the passive income it provides. Rental properties offer a steady cash flow, with tenants paying rent that exceeds the expenses associated with the property. This positive cash flow can then be reinvested into other properties, growing the investor's wealth over time.

Tax Benefits

Appreciation

Leverage

Tangible Asset

Unlike stocks and bonds, real estate is a tangible asset that investors can see and touch. This tangibility provides a sense of security and makes it easier to understand and manage the investment.

Diversification

Limited Risk

Compared to other investments, real estate is relatively low risk. While there are boom and bust cycles, property values tend to increase over the long term, and it is rare for real estate to lose value across the board. Additionally, investors can further mitigate risk by educating themselves about the market and implementing sound investment strategies.

Social Impact

Investing in real estate can have a positive social impact, particularly when it comes to strengthening communities. The YIMBY movement, for example, supports multifamily development to create an environment of collaboration and shared success among developers, residents, neighbors, and investors.

In conclusion, real estate investment offers a wealth of benefits, including passive income, tax advantages, appreciation, leverage, and diversification. It is a proven path to building wealth and is a popular choice among the rich for these reasons.

Private equity and venture capital

Venture capital (VC) is a form of private equity financing that focuses on providing funding to startup, early-stage, and emerging companies with high growth potential. VC firms or funds invest in these companies in exchange for equity or an ownership stake. This type of financing is often crucial for new businesses that do not have sufficient cash flow to take on debts. VC firms raise money from limited partners (LPs) to invest in promising startups.

There are some key differences between private equity and venture capital. Private equity firms typically buy 100% ownership of mature companies, whereas venture capital firms invest in 50% or less of the equity of startups. Private equity firms usually invest $100 million or more in a single company, while venture capitalists typically spend $10 million or less on each company. Private equity firms use both cash and debt in their investments, while venture capital firms deal with equity only.

Both private equity and venture capital offer high-net-worth individuals and institutional investors the opportunity to diversify their portfolios and aim for higher returns than those provided by the public market. However, these investment options are not accessible to the average investor due to the high minimum investment requirements.

Luxury items

The ultra-rich are defined as those with at least $30 million in assets, and they are known to spend their money on luxury goods and services. In 2016, they spent a total of $234 billion on luxury items, with the largest share going to travel, cars, and jewelry.

Luxury goods are non-essential products that people desire due to their high-quality craftsmanship and the status they confer. The most common luxury goods include designer clothing, handbags, jewelry, watches, and cars.

Travel and Hospitality: $45 billion a year

The wealthy spend a significant amount on travel, including over-the-top vacations and private jets.

Cars: $40 billion a year

Classic cars are a popular investment, with a 1955 Mercedes-Benz Uhlenhaut Coupé selling for a record-breaking €135 million in 2022.

Jewelry and Watches: $25 billion a year

Luxury watches, such as Patek Philippe creations, are highly sought after, with some fetching tens of millions of dollars at auctions.

Art: $25 billion a year

Art is another area where the ultra-rich invest, with auction houses like Christie's and Sotheby's selling billions of dollars' worth of art each year.

Yachts: $22 billion a year

The rich spend lavishly on yachts, with this category alone accounting for $22 billion in annual spending.

Apparel: $15 billion a year

Luxury clothing from high-end designers is a significant expense for the wealthy, with this market expected to make up about one-third of the luxury goods market by 2030.

Accessories: $12 billion a year

Accessories such as designer luggage, handbags, and sunglasses are also popular purchases for the ultra-rich.

Public equities

Stocks and shares are the biggest individual contributors to the portfolios of the ultra-wealthy, with equities comprising 26% of the average UHNWI's portfolio. This figure is even higher in the Americas, where equities make up one-third of their portfolios.

There are several reasons why investors are attracted to the public equity market:

• Investment gains: The primary benefit of investing in public equity is the potential for investment gains. Over time, the stock market tends to rise in value, despite daily fluctuations in individual stock prices. The average annual return for the S&P 500 since its inception in 1928 through 2017 is approximately 10%.
• Dividend income: Some stocks provide dividend income, which is an additional payment made by the company, regardless of whether the stock value has decreased. Dividends are decided by the company's board of directors and require shareholder approval.
• Liquidity: Public equities are relatively liquid compared to other asset classes. When trading on the main stock markets, investors can usually buy and sell stocks within seconds.

However, investing in public equities through the stock market carries several risks:

• Market risk: This is the risk of financial loss due to factors affecting an entire market or asset class, such as an economic recession or a stock market collapse.
• Business risk: This risk relates to financial loss associated with specific companies. For example, a company's stock value may decrease if it reports lower-than-expected earnings or becomes embroiled in a scandal.
• Liquidity risk: While the stock markets are generally liquid, liquidity can vary for individual companies and smaller stock exchanges. Lesser-known companies on smaller exchanges may be more difficult to sell and can result in a significant negative price impact.

In recent years, there has been a shift towards private markets among the ultra-wealthy. According to a Campden Wealth and RBC report, family offices managing wealth for the ultra-rich have allocated slightly more of their portfolios to private capital markets (29.2%) compared to public equities (28.5%). This shift may be due to the volatility of public markets and the attractive gains offered by private offerings not available to the general public.

Cryptocurrencies

Cryptocurrency is a risky investment due to its unregulated status, but it has made some people very rich. The Crypto Wealth Report from Henley & Partners reveals there are 88,200 crypto-millionaires, 182 centi-millionaires, and 22 crypto billionaires. This is out of 425 million crypto owners globally.

Bitcoin accounts for more than half of crypto-millionaires' fortunes, and 40,500 of them own Bitcoin. The Crypto Wealth Report also found that 72 centi-millionaires and six billionaires made their fortunes from trading Bitcoin.

A report by Morning Consult found that in the United States, high-income earners are disproportionately represented among crypto investors, with those making $100,000 or more annually comprising 25% of crypto owners but only 15% of the general public.

The Capgemini World Wealth Report 2018 suggests that 29% of millionaires have a "high degree of interest" in entering the cryptocurrency space as investors, while another 27% "sit on the fence". This indicates that a full 56% of high-net-worth individuals (HNWIs) are either prepared to invest in digital currencies now or could likely be swayed to do so in the near future. However, only about a third of the more than 2,600 millionaires included in the study have received information about investing in cryptocurrencies from their wealth managers.

The volatility of major cryptocurrencies such as Bitcoin makes them difficult, if not impossible, to use as currencies. Major currencies need to be mostly stable in order to act as a medium of exchange. So the ideas that cryptocurrencies can be both trading vehicles for profit and functional currencies to transact are at odds with each other.

The Future of Cryptocurrency

The popularity of cryptocurrency has grown in recent years as access to crypto has become easier. However, the asset is still incredibly volatile, and in 2022 rising interest rates caused sell-offs in Bitcoin as skittish investors offloaded speculative assets.

Governments around the world, including the United States, have started to analyze how to regulate cryptocurrency. On March 9, 2022, U.S. President Joe Biden signed an executive order calling for a broad review of digital assets, including cryptocurrencies. Federal agencies are reviewing digital currencies and assessing the risk they pose to overall financial stability, among other considerations.

The difficulties of tax reporting and the controversy surrounding crypto have resulted in the digital asset being entirely banned in more than a dozen countries, including Qatar, Saudi Arabia, and China. So far, El Salvador and the Central African Republic accept crypto as legal tender, although both countries have had significant problems with its implementation.

Frequently asked questions