Individuals that are looking to grow their wealth would be wise to consider opportunities to concentrate their bets in a smaller handful of ideas that have the potential to significantly rise in value. Those that have already had success in becoming wealthy and gained financial independence are likely better served by spreading out their bets and instead focusing on preserving their wealth, with growth a secondary consideration. And with their wealth, they may be able to pursue and take control of opportunities that other, aspiring rich individuals might not be able to take advantage of.
There are two ways to look at the amount that the wealthy might want to allocate to equities. On the one hand, they usually have a significant amount of wealth where it would be perfectly justifiable to play it safe and stick with bonds that pay a steady, if modest annual income. Those worth millions to tens and hundreds of millions could easily make a living with a coupon yield as low as a couple of percentage points. On the other hand, they have plenty of capacity and willingness to invest in stocks, which are considered more risky because the values can fluctuate considerably over shorter time periods. By setting aside safe money in bonds or similar assets, the rest could be allocated to stocks to grow wealth for heirs or other philanthropic purposes down the road.
Again, the bond argument can be made for income purposes, but could also be minimized beyond what is estimated to provide a sufficient annual income. Having several million dollars set aside in fixed income assets is enough to provide steady income, even in today's low interest rate environment. Municipal bonds may also be of interest given that tax rates can be high for the wealthy, especially for those that have a high adjusted gross income from either a job or other income sources. Municipal bonds are exempt from state, and even local income taxes.
With wealth comes the opportunity to buy residential and commercial real estate. The less wealthy may have to rely on mutual funds and pools of money to buy into properties, but the rich can more easily afford to buy entire holdings on their own. In battered home markets such as parts of Florida, Arizona and Nevada, there are opportunities to buy blocks of homes, which can then be rented out for income. The commercial space requires even more wealth as office buildings and industrial complex spaces can easily run into the hundreds of millions of dollars.
Most of us can gain exposure to individual companies by buying stocks or mutual funds. The wealthy can afford to buy a company outright. Many have even grown wealthy by focusing on a single company that performed fantastically. Now they might be able to acquire other firms and control their direction given the ability to take outright control. Private equity groups also perform this function on behalf of their partners. Many require hundreds of thousands, or even millions of dollars, to buy into their funds.
Again, unaccredited individuals can buy into exchange traded funds and other funds that buy into physical assets. However, the opportunity to buy timber acreage or land with mineral rights or natural resources, such as natural gas or oil, is going to be much more likely for wealthy individuals. Control is another advantage, with the opportunity to pick among the best assets and be able to negotiate a subsequent sale if the right opportunity comes along.
The Bottom Line
For the truly wealthy, money is no longer an option. In this regard, using their money for charitable and philanthropic reasons could provide the most bang for their buck. As with the above investments, wealth brings the ability to make a sizable investment and help control the direction of a non-profit to achieve the best results. Some of the wealthy are even able to create their own endowments and hire staff to carefully spend on the cause at hand.
These days, financial intermediation has made it possible for investors with only a few thousand dollars to gain exposure to the above investment opportunities. But for the truly wealthy, they can use their wealth to seek out even more compelling opportunities. Additionally, being able to have better control over the buying and selling of assets can have real, tangible advantages. There is a reason that control premiums exist for businesses and other physical assets.
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