Originally published by Ben Fraser on Forbes.com.
Many people chalk up the success of ultrahigh net worth individuals (UHNWI) to luck or trust funds, but the truth is, most of these people have common characteristics and strategies when it comes to guarding and growing their wealth.
And I’m not talking about obvious habits like “start investing early,” which I’ve read in countless lists. There are real, practical tools that multimillionaires and billionaires use.
We’ve studied the methods of these individuals for a while and found that many strategies are applicable to ordinary Americans also seeking to build wealth. So, that’s what I’m going to share today—the UHNW investor’s top keys to success.
Dominate The Tax Game
Propublica published an article releasing data from the tax returns of the wealthiest Americans. What it revealed is the overwhelmingly small percentage of taxes these individuals pay.
While there may be lots of opposing viewpoints on extreme wealth and wealth disparity in this country, the truth is that all of these top-earners found perfectly legal ways to, as a percentage, pay less in taxes than average American workers.
If you want to keep the wealth you’ve built, there are a few things we can learn from these tax strategies.
Focus on growing your “balance sheet” versus your W-2 income. This means focus on things that grow your net worth, rather than the income you earn from a job. For example, owning a rental property is an asset that adds to your total net worth through increased equity and appreciation over time, and comes with its own set of tax advantages. You will pay less in taxes for things like this than the income you earn from your 9-to-5 job.
Understand Economic ‘Tides’
Economic tides is my term for describing the bigger economic undercurrents that affect the short-term “waves” or activities. We write big economic updates with predictions for the coming year at the end of each year, and our advice is always the same: Look at the bigger fundamental drivers of supply and demand that will impact the economy over many years, not current oscillations of the stock market or latest doom-and-gloom headline.
These tides are things like long-term trends in inflation, unemployment, consumer and business sentiment, housing market supply and demand, interest rates and tax policies. Understanding the underlying trends and their trajectories will help you make solid long-term decisions for investing and protecting your wealth.
Consider Investing In Alternatives
Most UHNWIs have large portions of their investment portfolios allocated to alternative investments—or things other than stocks and bonds. Data from KKR shows that the allocation percentage the ultrawealthy have in alternatives is usually over 50%, compared to the 5% average investors put in alternatives.
While there are of course risks, as an asset class, alts tend to provide higher returns with less volatility than other markets. A balanced portfolio with true diversification is key.
If arguably some of the most successful investors invest heavily in alternatives, there is lots of potential there.
Use Debt As A Tool To Their Advantage
I won’t name any names, but we’ve all heard the financial gurus who paint all debt as the ultimate evil. But it’s simply not true. Good debt or “leverage,” i.e., debt used to buy assets, can actually be a significant tool for building wealth.
This is a hallmark move of the ultrawealthy. Even though UHNWIs certainly have the money or access to the money to purchase something they want, like a business or apartment building, instead, they borrow against their net worth and take out a loan to buy these assets.
Well, first of all, this allows them to keep their capital in their investments, which are ideally earning them additional returns.
Secondly, this debt they take on generally has a lower interest rate than their tax liability would be after liquidating an investment (another tax advantage like strategy No. 1).
And thirdly, debt is one thing that doesn’t adjust for inflation. With even moderate inflation, that debt is devalued over time, making that borrowed money even cheaper to borrow in terms of real money than the interest rate indicates.
Understand Risk-Adjusted Returns
If there’s one thing that too few investors take into consideration that the ultrawealthy understand, it’s that not all returns are created equal.
At face value, two different investment opportunities can have the same return. Say there’s a private alternative that returns 9% annually. To get a similar return in the public markets, you might have to turn to junk bonds. Well, junk bonds are notoriously risky, which means that the returns can be very volatile, leading to significant fluctuation, and potential loss of value.
To truly compare two investment options as apples to apples, you need to apply some qualitative analysis to normalize the potential returns, adjusting by risk factor.
Use Your Network To Find Good Opportunities
This strategy is probably the most obvious one among the list, but is not usually given the importance it deserves.
Your network can be an invaluable source of tools and resources, and of course, potential opportunities. The ultrawealthy are adept at leveraging their relationships to find new places to invest, as well as pulling on the experience of those they know to evaluate those opportunities.
While the majority of us will never be mega-millionaires, that doesn’t mean we can’t still apply some of the strategies that help the wealthy reach financial success.
Investment Opportunities with Aspen Funds
We have several private funds for accredited investors on our Offerings page. Regardless if you know which fund is right for you, our Investor Relations team would like to get to know you, your interests, and your timeline so that we can best serve you on your alternative investment journey. You can start by scheduling a call here.
Ben Fraser is the Managing Director and Chief Investment Office of Aspen Funds. Prior to Aspen, Mr. Fraser was a commercial lender at First Business Bank specializing in government backed loan originations (SBA & USDA), for one of the top SBA lenders in the nation. Prior to that he was a commercial credit underwriter for Crossfirst Bank, personally responsible for underwriting over $125MM in C&I and CRE loans across a variety of industries.