Many people accumulate lots of wealth in their lifetime by investing wisely over time. And if you play your cards right, you, too, might get to be pretty wealthy someday.
But there's a difference between being wealthy and ultra-wealthy, and the reality is that try as you may, you might never reach the point where you've lost track of how millions you have to your name. In fact, those who are super rich are often quick to offer advice as to how they got there, but the truth is, the strategies these investors adopt once they hit a certain level of wealth just aren't suitable for the average investor. Here's why.
1. The wealthy can pay higher fees
Some investments, like index funds, are extremely affordable due to the fact that they charge notably low fees. But actively managed mutual funds charge much higher fees -- sometimes, 10 times as high for a comparable investment -- because they give you access to an experienced fund manager who hand-picks stocks and follows the market, or certain segments of the market, day in, day out. While actively managed mutual funds may be a suitable choice for wealthy investors who can afford those higher fees, if you're an average investor, you're generally better off with index funds, which are passively managed and cost a lot less to get started with.
2. The wealthy can take on more risk
People who have millions upon millions of dollars to their name are apt to have an easier time dealing with significant losses than the average investor. As such, they can take on more risk in their portfolios -- risk you may not be in a strong enough position to bear. Imagine you were to lose $10,000 on a bum stock. For you, that might be catastrophic. For someone with millions of dollars, it's probably a non-event. As such, if you're an average investor, you're better off buying stocks with a proven performance history, strong earnings, and a clear competitive advantage. Let the wealthy invest in speculative stocks that could deliver strong returns, but could also crash and burn.
3. The wealthy can deal with less liquidity
Investing in real estate or art can be a great way to grow wealth. And the ultra-rich may have the means to tie up $1 million in an income property or $500,000 in a painting, both of which aren't as easy to sell as a stock or index fund. You, on the other hand, like the typical average investor, may not have the ability to tie up even a much smaller amount of money in an investment you can't unload quickly, which is why you probably can't afford to broaden your horizons the way the wealthy do.
4. The wealthy can afford investment minimums you can't
Some mutual funds and private investment funds impose minimums to ensure they have enough assets under management to meet their goals and cover their expenses. For a wealthy person, a minimum investment of $100,000 may be easily doable. For an average investor, it could be totally out of reach. Thankfully, it's possible to invest with very little money these days. Not only can you buy index funds at a reasonable price point, but the increasing availability of fractional shares means you can add stocks to your portfolio even when their individual share price is higher than what you can swing.
It's natural to admire the wealthy and aim to emulate their investing strategies. But the truth is, as an average investor, you're just not on the same playing field. Rather than bemoan that fact, do your best to develop a smart approach to investing that works for you. If you devise a plan and stick to it, there's a good chance you'll grow your assets nicely over time and wind up quite financially comfortable in your own right.