Many investors who reach ultra-wealthy status first start investing in escaping the 9-5 grind. They’re searching for a way to displace the income from their jobs so they won’t have to depend on their jobs and be tied to them.
Millions of newbie investors started their investing journeys in the past two years, albeit for an entirely different reason – for its thrill.
Spurred on by free trading on Robinhood and stimulus money, these new investors, like many longstanding investors, gravitated towards the liquid stock and crypto markets where they could duck in and out of investments for the thrill of the hunt.
Keeping close tabs on social media, internet buzz, and online communities (i.e., Reddit), these investors played the timing game – buying low and selling high – in hopes of hitting a home run every time.
The ultra-wealthy aren’t interested in speculating and aren’t drawn into the timing game like the masses.
It’s futile. Speculating on the stock market by day trading or picking individual stocks is futile. Even the professionals aren’t very good at it. Close to 90% of professional money managers underperform the market over ten and 20-year periods. And according to JP Morgan Asset Management, the average retail investor has earned an annualized return of 2.9% over the past 20 years. Taking into account inflation, the average retail investor loses money every year.
It’s another job. Professionals listen to quarterly earnings calls, talk to company management, attend industry conferences, and perform exhausting financial statement analyses. And still, nearly 90% of them fail to beat the market. That’s a lot of work for minuscule results.
It’s a dizzying roller coaster ride. The volatility of the stock market – as exemplified by recent market behavior since the beginning of the year – can be an emotional roller coaster for many investors – especially those who hang on every word, insight, and indicator for making their investment decisions. This can be emotionally draining.
The Ultra-Wealthy Prefer Boring…
The ultra-wealthy don’t need the emotional and pocketbook drain of speculating on stocks and crypto. They’re content with investing in non-sexy assets that may not excite the average investor but accomplish important objectives that mainstream investors don’t care about or yawn at.
What boring investment principles do the ultra-wealthy live by?
Get off the rollercoaster. The ultra-wealthy gravitate towards long-term private alternatives with little correlation to the broader markets. Investments in assets like real estate, venture capital, and private equity with long lock-up periods avoid the volatility of the public markets while allowing the asset or business to mature and produce positive returns on investment.
Reliability overexcitability. The ultra-wealthy prefer the prospects of consistent and reliable long-term income and growth over short-term home runs. Together with appreciation, reliable income can be reinvested to compound wealth more quickly and effectively than continually swinging for the fences and striking out with stocks.
Let somebody else do the work. The ultra-wealthy leverage the expertise, experience, infrastructure, and processes of others in order to conserve their own time and energy and avoid the headaches of doing everything on their own. They understand that only through leveraging the expertise of others can they create multiple streams of passive income essential for building and maintaining wealth.
Keep more of what you make. Investing in others through a partnership structure offers multiple tax benefits that allow investors to keep more of what they make. These benefits may include passthrough of deductions, tax deferral, exemption from self-employment taxes, and long-term capital gains treatment.
Don’t forget boring can be good.
The ultra-wealthy understand this, and that’s why they gravitate towards boring investments like real estate and cash flowing private equity – assets that may not stir excitement in the average investor, but that check all the boxes of their boring investment objectives, including:
Reliable and Consistent Passive Income;
A Buffer Against Stock Market Volatility; and