It is often said that the difference between a poor man and a rich man is that the former works for money, while the latter makes his money work for him.
Billionaires always seek manage to multiply their wealth. They spot money-making opportunities earlier than others and make investments that grow in value over time.
Let us take a close look at the key strategies commonly used by billionaires to make their money work for them.
Start investing as early as possible
One of the hallmarks of wealthy people is that they start investing as early as possible. By doing so, they are able to take advantage of the power of compounding to the fullest extent possible.
For example, assume that the average rate of return for the U.S. stock market over decades is around 10%. Let us say that you invest $1,000 at the age of 25. Assuming that the rate of return is 10% and the inflation rate is 3%, your investment will grow by 7% annually. By the time you reach the age of 65, your $1,000 will be worth nearly $15,000.
This is precisely why you should start investing at a young age, without waiting for the right time to enter the market. You can start small, save and invest whatever you can to begin with, then increase your investments gradually.
Play the long game
The market is filled with inexperienced investors who try to time the market and impatient investors who sell at the first sign of trouble. This is why their gains, if any, are usually short-lived.
Billionaires, on the other hand, play the long game. They follow a buy-and-hold strategy which pays rich dividends in the long term.
This does not mean that billionaires do not trade stocks at all. They most certainly do, from time to time. The difference is that they do not panic at the first sign of a downturn and they do not trade short-term gains for long-term gains.
There are two distinct advantages in holding your investments for a long period of time.
First, you get much better returns, as the market has an inherent upward bias. Remember, the U.S. stock market has survived two world wars and countless slowdowns, crashes, and recessions and has always managed to bounce back stronger.
Secondly, and more importantly, if you hold your investments for long periods, the returns are classified as capital gains and taxed at a lower rate compared to the rate at which your regular income is taxed.
Lower long-term tax rates is one of the main reasons why most billionaires tend to hold a significant portion of their assets in equities and tax-free bonds.
Buy when others are selling
This is one of the biggest differences between an ordinary investor and a billionaire. When the market slumps the ordinary investor tends to panic and look for an exit. The billionaire, on the other hand, sees it as an opportunity to make strategic investments that will pay off big in the future.
The stock market has managed to bounce back from the worst of recessions and depressions over the last two centuries.
Do not panic when there is a downturn or even a crash. Instead, look for value and growth stocks that can be purchased at a steep discount.
Diversify with real estate
You will be hard-pressed to find a billionaire anywhere in the world who has not invested in residential and commercial real estate — not just in the country they live in but also in different parts around the world.
There are many reasons why investing in real estate can be profitable for you in the short term as well as in the long term.
For one, real estate generates wealth through appreciation. Data from the National Association of Realtors shows that since 1968 the value of real estate in the United States has appreciated by 6% on a yearly basis.
Real estate can provide you with a steady stream of rental income. Even if there is a correction or crash in the real estate market and your property depreciates in value in the short term, you still have the monthly rental income to rely on, which is a huge advantage.
Real estate is a physical, tangible asset. It gives you a sense of security and reassurance that paper assets do not. As Mark Twain said, buy land because they are not making it anymore.
Use smart tax saving strategies
Billionaires tend to use a variety of strategies — from holding the bulk of their assets in equity to setting up trusts to pass down wealth from one generation to another — to reduce their tax burden to the extent possible.
When you think about it, tax management is a no-brainer. Why should you pay the taxman more than what you potentially owe? Thankfully, there are many ways in which you can reduce your tax bill to the extent possible.
First, increase the contributions to your retirement accounts to the greatest extent possible.
Second, do not miss out on tax deductions like mortgage interest, 401(k) contributions, HSA contributions, state and local taxes deductions, self-employment expenses deductions, home office deductions, medical expenses deductions, student loan interest deductions, charitable contributions, and more.
Finally, hold your equity investments for a period of at least one year to take advantage of capital gains taxes, which are lower than the tax rate applicable for short-term gains and your regular income.
Think and act like a billionaire
In order to invest like a billionaire, you should first start thinking like a billionaire.
Rather than becoming fixated on short-term gains, set yourself an ambitious long-term goal. Make the right investments, take calculated risks as and when necessary.
Most importantly, don’t allow an early success make you complacent or arrogant. Invest prudently and for the long-term, always.