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Not Wealthy? Don't Invest Like You Are

By Maurie Backman - Feb 14, 2021 at 6:18AM

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You may want to be rich, but that doesn't mean you should copy the rich when devising an investing strategy.

You'll often hear that it pays to mimic the habits of the wealthy. To some degree, that's good advice. Wealthy people tend to put their money to work by investing it, and that's wise at any income level. But the actual investing strategies the wealthy employ may not, in fact, be suitable for you. Here are three moves you should make that the rich probably wouldn't.

1. Stick to index funds

Hefty investment fees -- those you'll typically see with actively managed mutual funds -- can eat away at your returns and limit your ability to grow your money. If you're very wealthy, you may be able to easily afford those higher fees, but if you're an average earner, you probably don't want to get stuck paying them.

Man holding empty wallet open

Image source: Getty Images.

That's why it pays to focus on index funds. Index funds aim to track the performance of the market indexes they're associated with. An S&P 500 index fund, for example, will contain stocks from that index. The fees you'll pay for index funds can easily be 10 times lower than what actively managed funds will charge you. Index funds often outperform their actively managed counterparts anyway.

Index funds aren't designed to beat the market, which is something the wealthy generally want. But if you're content with matching the performance of the broader market, then index funds are solid.

2. Limit your risk

Wealthy investors may be able to take on certain risks that you can't, like owning physical properties that have the potential to appreciate in value but that also aren't very liquid. As a regular investor, you may not have the same flexibility. You may need to keep your money in liquid investments. In that case, buying REITs for your portfolio, not buildings, is probably a better bet.

3. Scoop up fractional shares

Wealthy investors have no problem paying thousands of dollars for a single share of stock, but you might. Plenty of stocks trade today with enormous growth potential whose share prices are out of reach for the average earner. But you don't have to give up on those stocks because you're not rich. Rather, you can buy a piece of the action with fractional shares.

Fractional shares let you own a portion of a share of stock if you can't swing or don't want a full share. Fractional shares make it possible to build a diverse portfolio even if your funds are limited. While the wealthy may not need to bother with fractional shares, they're great for everyday investors.

It's one thing to strive to be wealthy one day, but if you're not there yet, don't be afraid to let your investing strategy reflect that. You can always adjust that strategy as your financial situation improves. For now, it's OK to stay within a certain comfort zone and invest according to your means.

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