5 Surprising Ways the Rich Get Richer

By Dan Rafter on 23 November 2015 0 comments

You've noticed an interesting phenomenon: The richest people in the country have a knack for getting richer. Don't get jealous. Emulate them, instead.

How do the rich get richer? They don't fall for get-rich-quick schemes, they don't fall in love with their stocks, and they certainly don't panic whenever the economy takes a dip. And if you do the same, you, too, can steadily grow your wealth.

Here is look at some of the surprising — and not so surprising — ways that the rich keep getting richer:

1. They're Patient and Diversified

Laurie Samay, a certified financial planner and portfolio manager with Scarsdale, New York-based Palisades Hudson Financial Group, says that the wealthy never chase get-rich-quick schemes. Instead, they are more focused on preserving their wealth, usually by taking a "slow-and-steady" approach to investing.

The investment portfolios of the wealthy are almost always filled with a diverse array of stocks and bonds. Diversity protects the wealthy against economic swings. If one asset class is struggling because of outside economic factors, another might be doing well. Say oil companies are struggling because of low oil prices. Car makers might be doing better because gas prices are lower, encouraging more consumers to buy their vehicles. By investing in both oil producers and car makers, the wealthy investor's portfolio doesn't take as big a hit.

"Academic studies have concluded that the mix of stocks and bonds in a portfolio has the greatest influence on performance, even more so than transaction costs and security selection," Samay said. "Like the rich, your portfolio should be diversified."

Samay says that all investors should invest in different types of bonds, large-cap equities, small-cap equities, and international equities. She also recommends that consumers invest in specialty asset classes like real estate and natural resources to create the most diversified portfolio possible.

2. They Recognize Panic as Opportunity

Remember when the housing market crashed in 2008 and 2009? David Hardin, president of Hardin Financial Group in Troy, Michigan, does. He also remembers that the rich — at least the savviest of them — took this time to invest in real estate at lower prices as others dumped their properties. Today, the value of these investments has soared.

"Buy when others are panicking," Hardin said. "That is a strategy that the wealthy always use to grow their income."

Those who stay wealthy avoid the herd mentality that often results in big sell-offs in asset classes or stocks, Hardin said. Instead, they buy stocks and other investments when their value is at their lowest.

"People who really understand the markets and study them see opportunities when people are panicking," Hardin said. "That is when they often make lots and lots of money."

3. They Invest in Socially Responsible Companies

Andre Cherry, chief executive officer of Los Angeles-based investment firm Aspiration, says that the wealthy tend to invest in companies that are both sustainable and socially responsible. They don't do this just because they want to do good. They do it because these companies tend to be more successful.

"50 years ago, a company's value was largely in how many factories or how much heavy machinery it had," Cherry said. "Today, the real value of a company comes in their reputation. You can see this in the kind of financial hit BP took after Deepwater Horizon. Its stock took a hit that it still hasn't really recovered from."

Companies that are doing good — installing environmentally friendly practices, investing in employee wellness programs — tend to perform better, too, Cherry said. He pointed to Johnson & Johnson's employee wellness initiative. For each dollar that the company spends on the program, it receives $2.71 back in the form of a more productive and healthier workforce.

"When a company cuts waste or becomes more environmentally friendly, it usually saves money," Cherry explained. "When it installs workplace practices that encourage a more diverse workforce, they get an employee base that is more innovative and productive. Companies that have executives and boards of directors who are given financial incentives to think about the long-term instead of the short-term perform better, too."

4. They Never Fall in Love With Their Investments

Even the bluest of blue-chip stocks can steadily lose value as the country and consumer tastes change. The wealthy recognize this, and never fall in love with their stocks, Hardin pointed out.

"I've met some people who are absolutely in love with blue-chip stocks that they have inherited," Hardin said. "They won't get rid of them, and some of those companies are no longer doing well. They haven't done well for decades. They're living on past glory."

Hardin uses the classic example: "If the company you invest in sells buggy whips and buggy whips aren't in demand any more, you might need to get rid of that stock."

This leads to another important point about the wealthy: They spend a lot of time researching the companies in which they have invested. This helps them identify what might be cloudy futures for companies that have performed well in the past.

"You can't be efficient in the stock market or with your investments without research," Hardin said. "Would you buy a business without knowing what that business does and without understanding the market in which it operated? Of course you wouldn't. And you shouldn't invest your money without doing the same kind of research."

5. They Pay as Little in Taxes as Possible

The wealthy face the highest tax brackets. Because of this, they work hard to reduce their tax bill — legally, of course.

Samay said that wealthy investors distribute their investments across a mix of taxable, tax-deferred, and tax-free accounts, with the goal of placing their income-producing securities in tax-deferred or tax-free accounts. They reserve their taxable accounts for those growth investments that produce little to no dividend income.

This kind of mix reduces the amount of taxes the wealthy pay each year, which leads to one final point from Cherry: The wealthy spend as much time making sure that they don't lose money as they do working to make more dollars.

"It's easier to lose money than make it," Cherry said. "Protecting that wealth is one way to stay wealthy."

What personal finance lessons have you learned by watching the wealthy?

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