Intro
There are reportedly around 756 billionaires in the US, and the odds you’re one of them are slim, something like a 0.002% chance. So you’re telling me there’s a chance. Slim, but when it comes to handling money, why not take a cue from the people who have the most of it? I’ll tell you exactly why not, because we’re covering seven reasons you shouldn’t invest like a billionaire, and what you should do instead to build a more realistic level of wealth.
A billion is 1,000 millions. So even if you have a million dollars, you’re just 1% of the way there. Numbers can be depressing. But there are some good reasons why investing like a billionaire may not be the best idea for most people. Here’s the good news: you don’t need a billion dollars to have a great life, and therefore you don’t need to do what billionaires do. Here’s why.
Billionaires Focus on Preserving Wealth
One, billionaires focus on preserving wealth, not growing it. They use complicated tax strategies and estate planning tools, and probably have massive teams that help them with all of it. Here’s a couple examples. Billionaires often put their money into trusts, legal setups that help protect their wealth from high taxes and ensure it’s passed down to their kids and grandkids according to their wishes. They might also use charitable donations to reduce what they owe in taxes, and to support causes they care about, like APOPO, the Belgian-founded nonprofit that trains rats to sniff out landmines and tuberculosis.
These methods aren’t as much about growing their wealth as preserving it, since they’ve already built their fortunes and now focus on long-term protection. Most of us are more interested in strategies that grow wealth, and honestly, we don’t have enough money for these preservation strategies to make much of a dent.
Billionaires Have Access to Private Deals
Two, billionaires have access to private deals, think private equity or venture capital. Private equity is like the big leagues for established companies that need a makeover, similar to shows like The Profit, where someone buys a struggling business, turns it around, and sells it for a profit. Private equity firms raise a ton of money, usually from big investors. They buy up companies and try to make them more valuable by cutting costs, improving operations, or changing leadership, then sell the company or take it public to cash in on the higher value.
Venture capital is a little more like Shark Tank, but for startups. It’s for brand-new, high-risk companies that could blow up like a Scrub Daddy or a Squatty Potty. If the startup succeeds, they make massive returns, and if it tanks, billionaires can afford to take that hit. We can’t, which is why it would be far too risky to invest your money the way billionaires do. Plus, many of these opportunities aren’t available to the average Joe, so you can’t really replicate their success in these spaces because you don’t have the same level of access to these deals.
Billionaires Have a Higher Risk Tolerance
Three, billionaires have a higher risk tolerance. Along the same lines, when you’ve got billions, you can stomach higher-risk investments like tech startups or hedge funds. Hedge funds are like the high-stakes casino of investing. They can invest in anything, stocks, bonds, real estate, and even bet against things (aka hedging). This is super risky because they often borrow tons of money to chase huge returns. If it works, great, and if not, billionaires can handle the loss. You and I can’t. Plus, hedge funds are super exclusive and charge high fees, kind of like your college fraternity, minus the paddles and toxic masculinity.
Billionaires Can Absorb Losses
Four, billionaires can absorb losses. They can lose millions without it affecting their lifestyle. There will still be plenty of jets and yachts being bought. A good example of this higher risk tolerance is Elon Musk buying Twitter. He bought it for $44 billion in 2022, but after changes he made, like renaming it X, advertisers left, and the company’s value reportedly dropped by around $20 billion, a pretty significant loss. But Elon’s doing just fine. He’s still rolling out Tesla, sending rockets to space, and raising kid number 12.
Think of it this way: if someone with a billion dollars loses 99% of their money on an investment, they’d still have $10 million left. If you lose 99% of your money, you’re left with a couple of linty pennies and a sandwich if you’re lucky. Even if you had $100,000 and lost 99% of it, you’d only be left with $11,000. So a significant loss in your portfolio could mean postponing retirement or rethinking your entire life. You don’t have the same cushion to take big risks.
Billionaires Use Other People’s Money
Five, billionaires use other people’s money. Another huge advantage billionaires have is an endless lineup of wealth managers and banks ready to hand them cash at low rates whenever they need it. For the average person, investments don’t have spending value until you sell them. It’s like Beanie Babies: your Aunt Sandy is still holding onto a bunch from back in ’99, and if she’d sold them at the right time she’d be rolling in the dough, but she didn’t, so now she’s just holding a pile of bean-filled animals.
So to avoid selling their stock, billionaires will often borrow money from a bank or wealth manager and use their investments as collateral. I never recommend borrowing money, even if you’re a billionaire, but it’s a strategy they often use that affects how they invest. For the rest of us, keep it simple: invest consistently, avoid debt, and always use your own money.
Billionaires Have Influence Over Markets
Six, billionaires have influence over markets. If a billionaire says something is a good bet, people pay attention, which means what they say publicly can shift markets. Take another example from Elon Musk. In May 2020, Elon tweeted that Tesla’s stock price was too high. The tweet reportedly caused Tesla’s stock to drop almost 10% in a single day, wiping out around $15 billion from Tesla’s market value and almost $3 billion from Elon’s net worth, a pretty small hit for him in the end. You won’t have that same kind of pull in the market, so you’re playing a very different game with a different set of rules.
Diversification Isn’t as Critical for Billionaires
Seven, billionaires can afford to concentrate their efforts on certain industries or companies because they have other layers of wealth to fall back on. But for the average investor, like you and me, diversification is key. You don’t want to put everything into one thing that could fail. It’s better to cast a wider net.
How Should You Invest
So what does that wider net look like? You should be investing in solid growth stock mutual funds that support growth while helping reduce your risk. If doing what billionaires do won’t work for you, then how should you invest? Simple: invest like a millionaire, not a billionaire. But first, make sure you’re ready to invest in the first place. If you’ve got debt hanging over your head, or you don’t have three to six months of expenses saved up, pump the brakes on investing for now.
Why Your Income Is Your Secret Weapon
Your income is your secret weapon for building wealth. If you’re busy paying off debt or you don’t have an emergency fund, you don’t have the margin left over to invest. If an unexpected expense pops up, you could go further into debt or raid your investments to cover it, and your progress is gone. So when you’re ready to start investing, here’s what you want to do.
Investing Hack
Put 15% of your gross income into tax-advantaged retirement accounts, like a company 401k or a Roth IRA. Here’s a five-word investing hack: match beats Roth beats traditional. Here’s how it works. If you get a match from your employer, say 5%, start investing there to get the full match. Remember, you still need to invest 15% of your income regardless of the match, so after you’ve captured the match, take advantage of all the Roth options you can, at work or as an individual. Roth just means you pay the taxes now instead of later, which also means the money grows tax-free, and you can withdraw it tax-free in retirement.
So if you have a Roth 401k at work with solid funds and low fees, great, you can invest your entire 15% there. If not, you can max out a Roth IRA for yourself, and your spouse too if you’re married. And if you still haven’t hit 15% at that point, go back to traditional options like your 401k, 403b, or TSP until you get there. Just remember, you have to actually buy funds inside those accounts to be investing. Here’s what I recommend, diversifying across four types of mutual funds.
Growth Mutual Funds
Growth, growth and income, aggressive growth, and international. You might see these listed as large cap, mid cap, small cap, and international. Cap here stands for market capitalization. These funds focus on companies expected to grow faster than average, so while they can be more volatile in the short term, they have the potential for higher returns over the long haul, which makes them a solid option for retirement investing. This is the strategy I personally use and recommend, but you don’t have to take my word for it.
Millionaire Study
According to one of the largest studies ever done on millionaires, 8 out of 10 said that investing in their company’s 401k plan was key to their financial success. The same study found that millionaires generally didn’t risk their money on single stocks or a one-off opportunity they couldn’t pass up. In fact, single-stock investing didn’t even make the top three factors behind their net worth. So don’t try to get fancy or blindly throw darts at a board. Stick to proven investments and invest regularly, that’s the key. Be a crockpot in a world full of microwaves. If you want to build wealth and keep it, do it nice and slow.