Invest Like a Billionaire

Posted by - Wednesday, August 22nd, 2012

Many of Americans in the 1% have maintained their wealth through investment strategies. And many in the 99% have often looked at them and wondered, “Why can't I do that, too?”

Investing is tricky and risky. But the big-wig millionaires and billionaires always make it look so easy – they're at the top, after all.

And they've been able to grow their wealth exponentially. Between 1979 and 2007, the Congressional Budget Office reports, income of the 1% has risen by 275 percent, while income for the middle 60% has only risen by 40 percent.

And try as they might, the middle earners often can't seem to get rich off their investments like those billionaires have.

The problem is actually a paradox: they're trying too hard to invest like billionaires, while not using the tactics of billionaires enough.

But within that paradox lies the solution. If you're not a billionaire, you can't really invest like one. But you can look closely at the strategies that work for them and attach them to your own investments.

So here are some tips for investing like the super rich on your own budget.

1. Don't Invest to Get Rich

One of the reasons billionaire investors are so successful with their investments is because they aren't in it for a get rich quick scheme. They're rich already. Instead, they're in the frame of mind of protecting their wealth, as Brent Fykes of GenSpring explains. GenSpring works with investors capable of investing $20 million or more, so Fykes has been there. He says of the 1%:

“[B]y nature [they] are less risky because they've created a nest egg and don't need it to grow at incredible rates. They just want to stay rich. On the whole, the 99 percent is in the get rich mode.”

But what if the 99 percent were to switch their mindset? Someone looking to get rich is going to be more likely to take on more risk. But the billionaires aren't interested in risky plays. They're interested in things that are going to be profitable over the long term.

Billionaire investor Warren Buffett is a great example of this, and he has been known to make claims supporting his idea. He once told Liz Claman of Fox Business:

“Liz, you never want to buy the quarterback who just won the Super Bowl. He's too expensive. You want to buy the guy in the hospital bed with his leg in a sling because you know he's cheaper and the odds are, he'll get better and blossom.”

And that's what the 99% should do as well – bet in favor of the odds, even if it means waiting a while.

2. Lay Out Your Goals...Realistically

You probably want to receive gains off an investment for a purpose, so make a list of what these goals are. Of course, it's easy to say “I want to get rich.” But you have to be realistic about it. What are your goals for the money you plan to invest? What will it go to support? Kate Nixon of Northern Trust believes this is an important step in smart investing.

According to Bankrate.com, there are four goals that are common to many investors. These may be similar to yours, or you may have several different goals, but here the ones Bankrate.com suggests:

  • Family, which might include a wedding or education for a child.

  • Lifestyle, or your day-to-day expenses.

  • Capital assets for relatively short-term needs such as a car or a second home.

  • Philanthropy.

Once you lay out your goals, you can set a specific investment strategy for each one. This will help you stay realistic about what you hope to achieve, and with this realism can come opportunity.

3. Diversification

If your portfolio contains assets that are all similar, or if they all follow the same trends, it will be more risky – one of the reasons the 99% have more risky portfolios.

If you diversify your portfolio, you will be able to better manage the risk.

From Bankrate:

“You need some assets to be zigging while others are zagging,” says Nixon, who counsels clients to include assets across all capital markets in their portfolios. In addition to stocks, those could include some publicly traded real estate, commodities, high-yield bonds – all of which can be bought through funds and will decrease the portfolio's overall risk. “For example, one of the biggest risks is long-term inflation risk,” she says. “(Treasury inflation-protected securities) and commodities provide explicit inflation protection.”

And in addition to inflation, make sure you account for taxes and fees, Nixon says. It's easy to look past these factors, but they can really play into returns.

4. Don't Try to Copy What They Do

Billionaires often have a lot of their investments in hedge funds or private equity funds. That's because their annual income allows them to become accredited investors. If you make less than $200,000 a year or don't have $1 million in assets, you don't qualify for this.

You can, however, invest in mutual funds, which act like hedge funds. But Bankrate warns not to get too involved in these.

After all, going back to number 3, diversification is key. If you have all your investments in mutual funds, you aren't diversifying.

Plus, you could still be spending a fair amount on mutual funds. Nixon suggests:

“If you want risk management, there are cheaper ways to get it than by adding a mutual fund that replicates a hedge fund. For example, adding high-yielding, dividend-paying stocks or certain fixed-income products.”

Make sure you do your due diligence. That's what it comes down to: knowing what's right for you, not what has proved right for billionaires, and investigating options that could earn you high returns.

I'll leave you with two rules of advice from Warren Buffett, rules that cover all of this:

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”

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