How do millionaires invest their money?

How do millionaires invest?

Many people working hard for a living are often interested in how millionaires invest or made their money. The underlying premise seems to be that, if we could only find out how Warren Buffet or Bill Gates got rich, we might be able to duplicate it. Once someone has a few million pounds or dollars on their balance sheet, the most important question is actually how they make it grow, and how they protect it against inflation and other risks.

The two investment principles rich people follow

[1] Millionaires control their spending

One of the most important principles rich people use to protect their wealth is to make sure they spend less than their income. This may seem obvious but in a society where many rely on credit it does not always hold true. It’s no use to reach the stage where you have ten million in a balanced selection of investments, and those investments produce a return of one million every year, but your lavish lifestyle requires that you spend two million a year on cars, holidays, and entertaining other rich people. The numbers never lie. If you do any of the above, you will be getting poorer instead of richer every year.

Millionaires also do not easily allocate large amounts of their money in ‘assets’ that do not appreciate, such as expensive cars, fur coats, or ostentatious jewelry. Of course, this very much depends on the personality of the individual, but the fact remains that most of these things will only erode your wealth, not build or protect it. That’s why most millionaires own fairly simple cars and don’t fly to the nearest shopping mall in a private helicopter.

[2] Millionaires balance risk versus reward

Millionaires invest their money in various products, including a family home, other top-end residential and commercial properties, stocks, mutual funds, and retirement accounts. These have traditionally been investments that have low volatility and appreciate above inflation.

However, surveys have shown that a growing proportion of millennial millionaires have at least 25% of their wealth in cryptocurrencies and nearly half invest in NFTs. The new asset classes related to blockchain technology have unlocked billions in wealth for new millionaires this past decade.

For either higher or lower risk investors, the underlying principle here is that these people concentrate on investing their money in investments that offer the best risk/reward ratio based on their appetite. In other words, it should offer the highest possible reward at the lowest possible risk.

Following this rule, many rich people will rather invest in a stock that has a history of steadily increasing in value over a long period of time than one that wildly fluctuates in value over time and where the chances of not only major capital gains, but also major losses, are significant. Other millionaires stake a considerable portion of their net-worth into speculative investments where they have a high conviction for a high return.

A recent study by Fidelity Investment showed there is a higher likelihood that self-made millionaires will invest in stocks. By comparison, those who inherited large amounts of money have a stronger preference for real estate investments. Times may be changing now that a majority of next generation millionaires grow their wealth through newer and alternative assets.

Real estate – capital appreciation versus income stream

Although residential homes are typically regarded as appreciating assets, they do not really appreciate as much as most people believe. When Robert Schiller (the Nobel Prize winning economist) studied 20th-century house prices, he came to the conclusion that on average they increased in value at only about two percent more than the inflation rate every year. The U.S. house price averages versus inflation data is updated monthly in the Case–Shiller Home Price Index.

From that two per cent, there are expense deductions such as maintenance, taxes, and insurance. That does not mean that real estate is always an unwise investment or that it is shunned by millionaires. Quite the contrary. It means that when rich people invest in real estate, they follow the same risk/reward principle we discussed earlier. They either invest for capital appreciation, that is the total appreciation of the house over the desired investment period. Or, they invest in real estate for an additional income stream.

The risk involved in a real estate investment is typically lower than if one, for example, invests in stocks. And the rewards can far outweigh those risks. This is provided you invest in income-producing properties. Below are a few benefits of this type of investment:

Regular, stable income

The rental income from a commercial or rental rental property creates a stable, regular cash flow. By re-investing this money into other assets such stocks, millionaires are able to steadily increase their wealth over time. The better your tenants and the longer their lease term, the more predictable your income stream.

Capital appreciation

When it comes to investing in real estate, a popular strategy among wealthy people is to buy a neglected apartment complex of which the owners don’t have the funds for upkeep. They would then go on to refurbish and upgrade the whole property. Not only does this increase the market value of the property, but they are also able to significantly increase the rent.

Before buying such a property though, they would first study the local market and make sure that the expected growth rate over the next few years is positive. They would, therefore, rather invest in an old but structurally sound apartment complex in an upcoming neighborhood than in a shiny new apartment block that is located in a neighborhood that’s on a downward trajectory.

Tax benefits

Although tax structures often differ from one country (or state) to the next, owning a residential or commercial property that brings in rental income typically offers tax benefits. Rates and taxes, maintenance and repair costs, and management costs can typically all be deducted from the rental income. This increases the net income from the property and creates new investable funds. Property investors can also depreciate the value of their properties over time as an accounting strategy to offset income against expenses. This helps reduce their overall tax liabilities.

How millionaires invest in the stock market

When it comes to investing in the stock market, millionaires once again follow a few sound principles. These include the following:


Few millionaires would invest a majority of their investible capital in a single stock, unless they are nearly 100% certain of its likelihood to increase in price. This is why many prefer to diversify their investments across different asset classes to reduce risk. Diversification means you never invest more than a certain percentage. Usually this entails investing under 5% of your available funds in a single stock. This ensures your capital will not be wiped out by a single company bankruptcy or a speculative investment going sour.


Wealthy investors continuously study the market in search of new investment opportunities. They also seek investments where the current price represents a discount over its true value. While smaller investors might not have the luxury of being ahead of new investment trends or bargain buys, they nevertheless spend a significant amount of time researching the market. After all, to benefit from an opportunity, you must first know that it exists.


Most current millionaires who have made their money on buying and selling assets have done so through the stock market. Millionaire investors do not buy a stock based on a whims. And they won’t sell it based on a rumor. They understand the time value of money and how stocks appreciate over time due to perceived value. There are also new alternative assets, such as crypto currencies, that are becoming popular with investors due to their rapid appreciation in recent years. Although there are millionaires that amass fortunes making big bets on a few high conviction trades, many do so through slow and steady savings and investments.

Index funds: the perfect mix of risk versus reward for millionaires or the masses

Narrowing our discussion, we will focus our example on ETF indexes. ETFs’ are becoming a popular way for aspiring and existing millionaires to growth their wealth. Investing in ETFs over a 10 year period can potentially yield a 4x return. The VOO ETF is one of many that invests and holds stocks in the S&P 500 Index. The S&P 500 index is considered a bellwether of the U.S. stock market.

If an investor was to put $10,000 USD into VOO, in 2011 the average return over this period would have exceeded 10% per annum, resulting in an investment of over $38,000 USD by 2021. Many investors and professional fund managers struggle to beat the performance of the S&P500. The VOO ETF, as well as others like it such as SPY, closely track the S&P500 index’s return.

Historically, the average annual performance of the S&P500 since 1957 to 2018 has been roughly 8%. So, we can see that the S&P 500 as a whole has provided a good return to all those who invested, millionaire or not.

However, although index fund investing seems simple, it’s not. Even in the past 10 years, there have been periods of uncertainty when most investors would have reconsidered their holdings. Experienced investors have clear rules on when he or she would sell a particular stock. They would likely not randomly buy or sell shares based on short-term market trends. For these investors, the only justification for selling a stock is when the original reasons for buying no longer exists.

Despite the ups and downs, index funds have become one of the most popular investment products in recent years. In the US, for example, around half of all stock investments are now done via passive funds, including index funds. Both professional investors and novices like their market-matching performance and low costs.

Wrap up

This article has reviewed how millionaire diversify their investments to protect and securely growth their wealth. The strategies millionaires use may not work best for individuals who are looking to quickly growth their wealth or net-worth. However, they do provide some perspective on how you can look to maybe investing with a millionaire mindset.