Invest Like the Wealthy

The rich, the top 10%, keep getting richer and the gap between them and everyone else keeps widening. Some say our flawed capitalistic system favors the rich. Would I get bombarded with ugly emails if I suggested that the lower 90% should learn from the rich and consider doing what they do?
A speaker at a financial conference made a bold statement that I have considered for many years since. He said, “Rich people get richer because they invest in growth assets like stocks and real estate. Poor people stay poor because they focus on principal protection.”
People have told me, “I lost money in the stock market so I got out.” I sometimes display a stock market graph that shows what happened after they cashed out and say, “As you can see, you didn’t lose money because you were in the market, you lost money because you got out.”
In an investment chat room recently a gentleman boasted that his financial advisor had put him in an investment that “had never lost me a penny” and that he also “had never charged me a penny.” He then went on to ridicule those who put their money in the stock market.
I hear this comment often and I get annoyed because it is based on half-truths and a poor understanding of the products involved. Does this gentleman really believe his financial advisor is running a charitable non-profit? I have bought many cars and the salesman has never given me a bill for his services, but I have no question who is paying his salary. All financial advisors get paid, and all of them get paid by their clients.
The “investment” the man described is an insurance product. An insurance company’s main focus is to protect against a loss, with any potential growth being secondary to that purpose. Insurance is not an inherently bad thing. I insure my business, vehicles, house, health and life. I pay a lot for insurance and rarely get anything back, but in the event of a loss, the insurer guarantees to assume the risk. I don’t expect the insurer to make me money, just keep me from losing it. So insurance is designed for “principal protection.”
We all like guarantees. Who wouldn’t love guaranteed jobs, healthcare, and investment accounts? But guarantees come at a price, and it is often more than you expect. In the simplest terms, with investing you either take some risk to obtain growth, or pay someone else to assume the risk for you, and in so doing transfer away much of your potential gains.
So, why do the rich keep getting richer? There is no single answer but I recently studied the Forbes list of the 400 richest Americans. Not surprisingly, almost all of them listed stock or real estate ownership as the source of their wealth. Not a single one credited CD’s, guaranteed annuities or any other “principle protected” investment. They must know something that the other 90% might want to pay attention to.
(There is no guarantee that any investing goal will be met.  Past performance is no guarantee of future results.  Talk to your financial advisor before making any investing decisions.)