Why the rich stay rich: they don t invest like the rest

2014-06-26 14:27:06

Bryan Borzykowski

Getting and staying rich...

When many of us have a little cash to invest, we might buy a mutual fund or a

stock if we don t blow it on the latest tech gadget. Not the truly wealthy,

however. They often put their money in property, art, businesses and other

investments that the rest of us can only dream of owning. How this rarified

group uses their cash differentiates them from the rest of us and keeps them

in the black.

Take Joshua Coleman, for example. When his family sold their Chicago-based

telecom company for $400m in 2004, they didn t run out and buy something

extravagant. Instead, they began seeking advice on ways to save their newfound

riches and help them grow.

Their quest sparked an idea for Coleman, now 27. In 2011, he launched Momentum

Advanced Planning a firm that connects people to tax, legal and wealth

experts. If the business one day sells, he could see a big return, just like

his family s first business.

If you think that starting a business is an odd way to invest your money, then

you probably aren t among the ultra-wealthy. People who have at least $30m in

assets dubbed ultra high net-worth invest in stocks and bonds, but they

also grow their money by buying companies and investing in unusual securities,

such as airline leasing funds. They also own art and cars that they hope will

appreciate in value.

It s called alpha risk, said Coleman. It s this kind of stuff where there

can be a lot of upside.

As for the downside, many of these investments are riskier than traditional

investments, so there s a higher chance of losing a large chunk of change. As

well, they re far less liquid than stocks and it could talk months or years for

the wealthy to get their money out of an investment.

Even if you don t have millions to invest, though, you can learn a thing or two

about how the rich reap returns and apply it your own portfolios.

Scroll through the images above to see how the rich invest to stay rich and

how you might model their style.

Rich-only investments? Perhaps...

The wealthy have access to a swath of investments that most people don t even

know exist.

Closed-end funds a long-term investment where money is typically tied up for

at least five years offer the very rich access to big returns and high

yields.

Aircraft leasing is one budding area of investment, said Ian Marsh, CEO of

asset management for London-based Fleming Family and Partners, a wealth

management firm that was initially created to preserve the fortune of Ian

Fleming, the creator of James Bond.

His clients work with a company called Doric, which uses investor money to buy

planes which are leased to large airlines, such as Dubai-based Emirates

Airlines.

Investors will eventually cash out of the fund when those planes are sold, but

they can make a 9% annual yield in the meantime from the leases alone. The

average yield on the Standard and Poor s S&P 500 America s main investing

benchmark stock basket is about 3%.

Some closed-end funds require hundreds of thousands of dollars to buy in, but

Doric s airline leasing funds have a more reasonable entry fee, says Marsh. Its

SKY CLOUD series of funds which buy Airbus A380-800s and leases them to

Emirates Airlines have a minimum investment of 10,000 euro ($13,822) and 5%

one-time fee that is based on how much investors put in.

Ultra high-net worth investors in the UK and elsewhere are also buying up

farmland. As the global population grows, demand for food will also increase

and those who own prime agricultural land could see good returns, said Marsh.

Arable land is a finite resource the harder something is to come by the better

the return.

According to Marsh, good land can earn a yield of about 4% a year for an

investor, plus appreciate in value over time. Few regular investors can afford

to invest in a plane fund or buy a plot of rich farmland, but there are some

more-accessible closed-end funds that offer a way to invest in global

infrastructure, even wine. There are also some publicly listed companies that

people can buy on the stock market. For instance, Gladstone Land is a US-listed

company that buys farmland.

Buy more businesses, of course...

It s a natural for wealthy individuals, many of whom made their money owning

companies, to buy into other businesses. Coleman invests in a number of other

companies, mostly in the professional services and tech sectors. He has a stake

in so many operations that he can t give an exact number.

It s a lot, he said.

He s usually investing with a group of investors and a private equity firm, and

he ll invest more than $1 million to get a piece of an operation.

It s fun to see companies go from nothing to something and many investors have

the experience and networks to help get a business off the ground, said David

Rose, a New York-based ultra-wealthy entrepreneur and author of Angel

Investing: The Gust Guide to Making Money and Having Fun in Startups.

Imagine investing in Google when they were still in their trailer, he said.

You can meet the founders on a weekly basis, get a first hand look at what s

happening and see it grow. That can be a lot of fun.

It can also be lucrative. Though investors put their money at risk 50% of

startup companies go bust, said Rose a wealthy investor usually makes 20

times to 50 times their initial investment on one or two companies that do

succeed.

Rose usually puts between $50,000 and $100,000 in a company, and he said he has

made millions off some of his investments.

At the moment, it s difficult for the average investor to invest directly in a

business, unless they hand over some money to a friend or family member, says

Rose.

However, a new piece of US legislation, passed in 2012, may allow regular

people to invest in startups. It s not yet clear how this will play out.

Play up pricey passions...

Passion investments, such as art, cars, watches, wine and even musical

instruments, are big among the rich, said Guy Hudson, executive director and

head of business development at London s Stonehage Investment Partners, a

global wealth management firm.

While people want these assets to grow in value, they re also buying them to

either use or look at.

These investments always arise from the investor s passion for that particular

object, said Hudson.

For investors who buy the right passion investments finding something rare is

key here they can see solid returns. According to his company s research, the

value of investments of passion rose by nearly 15% in 2013, said Hudson.

There are several ways for regular investors to buy passion investments, says

Hudson. A wine fund sold by The Wine Investment Fund requires a minimum 10,000

euro ($13,822) investment, for instance, and there are other funds that focus

on art and cars. Take note: some may require the investor to be accredited, so

even if the initial fee is low, you may not be able to purchase the fund.

You can also buy art for affordable prices at auction. Up and coming artists

will sell their pieces at reasonable rates, he said.