There are many financial and tangible assets in the world. Starting from real estate, bank deposits, pension savings and ending with stocks, bonds, futures and options. It is important to know where wealthy people invest if you want to become wealthy or at least financially independent.
Let’s order all people in terms of income and assets. The first lines will be the wealthiest people, the last – the poorest. All people in one degree or another own some assets or have some debts and loans. Of course, someone has neither one nor the other.
Figuratively speaking, we are primarily interested in where the first 1% of the wealthiest people invest, then the next 9% less wealthy and then the remaining 90%. Thus, we will find out if there is a relationship between where wealthy people invest (owning of certain assets) and wealth itself.
The scientific work of economist Edward N. Wolff “Household Wealth Trends in the United States, 1962 to 2016” will help answer this and other questions. The paper collected statistical data and published tabular results for US households from 1962 to 2016. US household results can be extrapolated to the rest of the world.
A household is an economic unit consisting of one person or several people (not necessarily relatives) engaged in economic activities, such as investments.
Types of assets in which wealthy and poor people invest
Assets that wealthy and poor people invest in are divided into types and ways of ownership:
- Business equities – a private company as a whole or a certain share of it;
- Securities – various equity and debt financial instruments (stocks, bonds, warrants, futures, etc.);
- Mutual funds – structures that manage the capital of investors for the purpose of earning profits above market indices;
- Trusts – structures that manage capital in the interests of the beneficiary. The beneficiary transfers his capital to the trust;
- Stocks – securities testifying to the owning of a certain share of a public company (issuer). It is possible to invest in shares directly or indirectly through financial structures;
- Non-residential real estate – offices, hangars, warehouses, hotels, etc. Wealthy people invest in non-residential real estate for profit. This is a kind of business;
- Life insurance – insurance policies that require the insurance company to pay compensation in the event of an insured event that causes serious injury or death;
- Deposits – bank deposits. The amount of money transferred to the bank at a certain percentage. As a rule, interest is small, at the level of inflation;
- Pension accounts – retirement savings of individuals, managed by public pension funds;
- Housing – residential real estate used directly for living and not for renting for profit;
- Debts – loans and debts that should be repaid in a specified time.
Dependence of wealth on the type of assets
Let’s see where wealthy and poor people invest in the form of households. Data is normalized and displayed as a percentage:
- The top 1% of the wealthiest households with a welfare of $10.26 million mainly invest in business (65.7%), stocks, mutual funds (53.2%) and other securities (64.6%). Have a few deposits (23.7%). Pension accounts (13.7%), debts and loans (6.7%) are practically avoided. Real estate is used for making earnings (40%);
- The next 9% of wealthy households invest almost equally in both equity and debt securities, and in real estate, deposits, retirement accounts, etc.
- The remaining 90% of households with a welfare of less than $1.14 million have large debts and loans (72.4%), mainly investing in residential real estate (58.7%), pension accounts (35.2%) and bank deposits (34.7%). Practically do not invest in the shares of companies (5.7%) and in various securities (6.2%).
Dependence of income and wealth on stock ownership
Let us see what is the relationship between the percentage of stock assets in ownership and the level of household income:
The chart show a strong correlation: the higher the level of household income, the greater the percentage of equity assets they have.
Now let’s see what is the relationship between the percentage of stock assets in ownership and the level of household welfare:
The chart also show a strong correlation: the higher the level of household welfare, the greater the percentage of equity assets they have.
Successful people are wealthy for a reason and scientific research confirms this. The level of wealth is directly related to where wealthy people invest. They invest in some assets, avoiding others.
The most advantageous to own a business or invest in other businesses, becoming a co-owner. A business sells demanded products or services generating cash flow. It’s like a chicken laying golden eggs. Only business owners control all cash flows and profits of the company, taking the bulk of themselves and paying the rest in the form of wages to hired staff. A good business in the long run can bring in 15–30% per annum above inflation.
Being a creditor, investing in debt assets (bonds, deposits), is not so profitable, because the creditor does not participate in the distribution of business profits, staying away. The owner of debt assets is not the owner of stocks. The lender is entitled to a certain percentage of profitability, which is substantially less than the percentage of business profitability. The yield of good debt instruments is 6–12% higher than inflation.
Putting money in bank deposits, becoming a bank lender is a bad idea. The rate of return on the deposit hardly covers the rate of inflation. Banks deposit customer money at a low rate of return, and then lend the same money in the form of loans to other customers at a high rate of return, earning on the difference.
In some cases, real estate investments bring good returns. For example, when renting office, hotel or industrial real estate.
The worst thing is to be a debtor. Debts can be useful for structures with limited liability in the role of leverage when the profitability of the structure is higher than the debt rate. Personal debts and loans should not be. Wealthy people try not to have debts.