Millionaires' Secrets: Where They Invest Their Money

Where do millionaires put their money? It's a question many of us have pondered, and the answer is that they put it in many different places. The majority of millionaires are self-made, with only about 20% inheriting their wealth, and they tend to be frugal, saving and investing their money in a variety of financial and real assets. These include stocks, mutual funds, retirement accounts, and real estate. They also keep a lot of their money in cash or highly liquid cash equivalents, such as money market mutual funds, certificates of deposit, and Treasury bills.

Cash and cash equivalents

Millionaires bank differently from the rest of us. Any bank accounts they have are handled by a private banker who also manages their wealth.

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. 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 include 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 US government to raise money. They are usually purchased at a discount. When you sell them, the difference between the face value and selling price is your profit.

Millionaires also have zero-balance accounts with private banks. They leave their money in cash and cash equivalents and 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.

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.

Stocks and stock funds

Millionaires often hold a portfolio of only a few equity securities, including index funds and dividend-paying stocks. Index funds are a popular choice due to their decent returns, low management fees, and excellent diversification. Dividend-paying stocks provide passive income, which is attractive to millionaires who want a steady cash flow without the hassle of actively managing their investments.

When it comes to stock investments, millionaires tend to keep things simple and focus on long-term returns. The average annual return from the US stock market over the past 100 years has been about 10%, making it a solid investment choice. Additionally, stocks have the advantage of being a more liquid asset compared to other investments such as real estate.

It's worth noting that millionaires also invest in a variety of other asset classes, such as real estate, bonds, cash, and alternative investments. However, stocks and stock funds play a significant role in their investment portfolios.

To become a stock market millionaire, here are some strategies to consider:

• Minimize taxes on investment gains by avoiding active trading and investing for capital appreciation instead of income.
• Keep investment costs low by choosing low-cost funds or individual securities and minimizing trading fees.
• Invest in yourself first by improving your skills and becoming more valuable to your business or potential employers. This can lead to higher earnings, which can be invested in the stock market.
• Save money and live below your means to create excess cash for investing.
• Make disciplined, automatic investments on a monthly basis to take advantage of dollar-cost averaging.
• Choose the best stock investments by conducting thorough research and seeking expert advice when needed.

Real estate

There are several reasons why real estate is a favoured investment choice for millionaires. Firstly, it offers a tangible asset that provides a sense of comfort and stability, especially during market downturns. Real estate also tends to retain value, even in challenging economic times, and has the potential for long-term value appreciation. Additionally, millionaires view real estate as a source of passive income, whether through rental properties or commercial ventures.

When investing in real estate, millionaires often consider both hands-on and hands-off opportunities. Hands-on approaches may include small-scale residential rental properties, where they act as landlords, handle maintenance, and choose their renters directly. On the other hand, large-scale residential rental properties or commercial real estate investments tend to be more hands-off, with investors relying on property managers or real estate agents.

Millionaires also recognise the importance of understanding the real estate market, including local market conditions, competition, and potential clients. This knowledge helps them make informed decisions and avoid common pitfalls, such as the flawed belief that real estate values can only increase. By staying informed and adaptable, millionaires can maximise their returns and minimise potential losses in the real estate market.

Overall, real estate investing offers millionaires a combination of stability, value appreciation, and passive income potential, making it a cornerstone of their investment strategies.

Private equity and hedge funds

Private equity funds typically invest in private companies, either by purchasing them outright or acquiring a controlling interest in publicly traded companies. They may use leveraged buyouts to acquire financially distressed companies, aiming to improve and sell them for a profit. This process can take several years, and private equity funds usually have a team of corporate experts to manage the acquired companies. As a result, private equity funds are focused on the long-term potential of their portfolio companies.

Hedge funds, in contrast, are alternative investments that aim for the highest possible returns in the shortest amount of time. They invest in a diverse range of assets, including stocks, bonds, currencies, derivatives, and more. Hedge funds often use leverage, or borrowed money, to increase their returns, but this strategy also increases risk, as seen during the 2008 financial crisis. Due to their focus on short-term profits and use of complex strategies, hedge funds are less regulated than other investment vehicles and are typically only accessible to accredited investors.

Both private equity and hedge funds require significant capital to invest, with minimum investments often starting at $250,000 or more. These investments are therefore only accessible to high-net-worth individuals or organisations, such as universities or pension funds.

Alternative investments

• Financial Securities: Tradeable assets that hold monetary value.
• Private Equity: Buying shares in a private company or a group of companies, often through private equity firms, venture capital funds, or crowdfunding platforms.
• Real Estate: Investing in physical properties, property-based securities, real estate crowdfunding platforms, real estate investment trusts (REITs), or real estate mutual funds.
• Commodities: Investing in raw materials such as gold, silver, oil, or agricultural products. This can include investing in tangible goods or through trading platforms, exchange-traded funds (ETFs), or mutual funds.
• Art and Collectibles: Investing in art, sports memorabilia, entertainment memorabilia, high-end watches, or other collectibles.
• Cryptocurrency: Investing in digital currencies through exchanges, brokers, or online platforms.
• Peer-to-Peer Lending: Making loans to individuals or businesses through online platforms that connect borrowers with investors.
• Hedge Funds: Typically only available to accredited investors with a high net worth and substantial investment capital.
• Luxury Goods: Such as expensive wine, rare whisky, classic cars, jewellery, and handbags.
• Equity Crowdfunding: Owning shares of startup companies that offer funding through equity crowdfunding websites.

It is important to note that alternative investments are generally riskier and more complex than traditional investments, and they may have higher fees and expenses. They may not be suitable for novice investors.

Frequently asked questions