Yahoo Finance 5 Big Money Risks Rich People Take — Which Ones Are Right for You?
The risk-versus-reward proposition is an immutable force from the boardroom to the blackjack table. The more risk you take, the more money you stand to gain — and lose.
The rich are masters at tip-toeing that fine line with the precision expertise of a tightrope walker.
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“Wealthy individuals engage in calculated financial risks, embodying the values of innovation and strategic diversification,” said Jonah Larkin, a leadership consultant who has advised the executive management teams of major corporations like Wells Fargo and serves as a facilitator in the Interpersonal Dynamics Program at Stanford University Graduate School of Business. “My approach encourages embracing risks that align with one’s core values and long-term vision, thereby turning potential vulnerabilities into profound strengths.”
Too little risk will mire you in mediocrity, but if you wager too recklessly, it will all come crashing down. Here’s a look at the big gambles the rich are known for taking and whether you should consider taking them yourself.
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Investing In Startups
Investing in an ETF that tracks the S&P 500 has risk, but the risk is muted because those companies are giants with resources and reach that make them almost too big to fail. Small-caps, on the other hand, are much more volatile because, while they still have lots of room to grow, their fledgling status makes their positions much more precarious.
But the biggest gamble of all are the companies that aren’t even companies yet, and that embryonic stage of business is where many millionaires make their money — as the earliest seed investors of promising-but-still-nascent entrepreneurial endeavors.
“Investing in startups embodies a powerful testament to the principle of turning perceived limitations into powerful assets,” said Larkin. “The rewards of such investments can be transformative, driving innovation and economic growth. However, they also carry risks, such as potential total losses, which underscores the importance of a balanced portfolio.”
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Creating Your Own Startup
Some people get rich by investing in other people’s businesses at the birth stage. Others — like Steve Jobs and Bill Gates — take the bold risk of giving birth to their own.
“Many of our top entrepreneurs will be looked up to and admired for generations,” said Robert Valentine, founder of the personal finance site The Money Alert. “Entrepreneurship offers an endless potential for wealth creation, freedom to call the shots and the opportunity to pursue dreams. The sky is the limit, though these successes don’t come easy. Many new startups fail very quickly. There are inherent risks, such as financial loss, lack of consistent income and unpredictability. Starting a fruitful business takes a great deal of effort and sacrifice. A tireless persistent work ethic combined with a vision for success is paramount. The opportunity cost, when compared to alternative employment, is a vital consideration. For prospective entrepreneurs, the concept of risk-reward should be evaluated here.”
Leveraged Investing
Some rich people use other people’s money to make money through the high-risk, high-reward strategy of leveraged investing.
“They borrow money to invest in ventures that generate higher returns than the loan’s interest rate, a strategy not without risk as losses can likewise multiply,” said Adam Horvat, director of finance at brand building and marketing firm Digital Silk.
Examples include margin investing and options trading.
According to RBC Wealth Management, “It should be noted that leverage is NOT FOR EVERYONE. When done correctly it can work well, but when done incorrectly it can lead to amplified losses. Because of this, before you implement any leverage strategy, you MUST discuss your financial situation with a qualified financial planner.”
“A safer takeaway for the average person might be to focus on learning about compound interest and investing in long-term assets, which can multiply their wealth over time,” said Horvat.
Stock Picking
Diversification is one of the central tenets of responsible investing. By spreading your money around to many companies, you mitigate the risk of losing it all if one of them goes bust — but you also water down your potential for sky-high returns.
“The rich commonly take outsized, concentrated risks in individual companies — often their own,” said financial attorney Lyle D. Solomon, founder of Oak View Law Group. “The pros are reaping maximum rewards if that business booms. The cons are uncommon exposure to a single point of potential failure.”
Investing In Emerging-Market Real Estate
Real estate — including homeownership — is a common path to wealth-building. It’s always risky, but the rich up the ante even further by betting on neighborhoods, regions or countries that are just getting off the ground — what businesses would call the startup phase.
“I’ve noted that many of our wealthier clients are drawn to real estate in emerging markets,” said Rhett Stubbendeck, finance and insurance expert and CEO of Leverage Planning. “These investments can be lucrative as I’ve seen, but they’re not without their risks, such as market downturns and regulatory changes.”
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This article originally appeared on GOBankingRates.com: 5 Big Money Risks Rich People Take — Which Ones Are Right for You?
