Crazy ways wealthy people build their $$$
The inside scoop on some of the strange, sneaky, but legal ways people build and protect their wealth.
A few years ago, when I was doing research for my second book, Broke Millennial Takes on Investing: A Beginner’s Guide to Leveling Up Your Money, I decided to write a chapter dedicated to the ways wealthy people protect their money. So, I posed this question to every expert I interviewed for the book: “What do wealthy people do that differently that you believe the average Millennial should know?”
Your mind might already be racing because you’ve heard the cliches about the behavior of rich and successful people. You’ve clicked on or scrolled by clickbait headlines that make us all feel terrible about ourselves because real-go-getters wake up at 4 am, meditate, take an ice cold shower, do intermittent fasting, read two newspapers, the New Yorker, and at least two books a week, don’t watch TV, and do intense cardio at least one hour per day.
But those weren’t the kind of answers I received from experts.
Some of the responses were about the tried and true methods of investing early, being consistent and diversifying. That’s really the playbook for how the average Joe can build wealth. But I wanted to know, what do folks do when they already have, let’s say $10 million or more?
Be warned: this could really rile you up because some of these methods are legal, but feel super sneaky.
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Diversify in really unique ways to take advantage of loopholes
One woman I interviewed for the book used to work in wealth management for high net worth individuals, meaning assets that exceeded $25 million. She witnessed all sorts of crazy ways the wealthy protected their money. One way was buying art, very expensive art. Except it wasn’t just buying art as a way just to diversify an investment portfolio. Oh no. These wealthy people were buying art and moving it to different countries or even warehouses known as free ports. These free ports are used as a tax loophole and exist all over the world. Even if the free ports are on U.S. soil, the art stored there hasn’t gone through U.S. customs yet and therefore the owner of the art can delay taxation.
This taxation loophole is also detailed in a really great episode of Planet Money.
In that episode the reporter gives a specific example of how the art storage tax loophole technique works.
“Say her client bought a work of art for a million dollars. If that client buys art in New York at Sotheby’s, he has to pay the New York sales tax, 8.875 percent. That’s $88,750. But maybe he sends that work of art straight to a free port – maybe in Geneva or Singapore. He doesn’t have to pay that tax.”
Access to different networking and investment opportunities
Achieving certain levels of wealth unlock certain opportunities. Many years ago I first heard about the Tiger 21 club in a book called The Thin Green Line: The Money Secrets of the Super Wealthy. To join, members had to have a minimum $20 million net worth. It wasn’t so much a secret society because they allow reporters in and openly accept new members without cult-like rituals.
Well, there’s one ritual: the Portfolio Defense. Basically, holding each other accountable for financial goals and decisions by examining each other’s financial portfolios. The group itself works as both a support group and peer mentorship for the wealthy. The founder was quoted in a New York Times article from 2007 about the group saying, “We have a lot of people here who have been fantastically successful entrepreneurs,” he says, “but basically mediocre investors.” The original members were largely self-made and didn’t inherit their wealth, so the peer mentorship works as a brain trust to advise on investments and large financial decisions. Of course, you have to also assume there are a lot of opportunities to do dealings with other members.
An article in the The Globe and Mail pointed out:
“High-net-worth investors who are entrepreneurial often invest not only money but also their time, taking board seats in startups where their experience can provide guidance to management, protect their investment and contribute to the return they hope to achieve.”
The Tiger 21 club was noted in that article as a way in which some of these networking opportunities are formalized.
Focus on emerging markets or industries
Having a lot of money can enable you to also take significantly more risk than the average person, which is why some of the ultra wealthy will focus on emerging markets or industries as a way to rapidly grow their wealth. Sometimes it’s creators in sectors (e.g. tech in the 90s) or venture capitalists who make well-timed early investments.
Sometimes it’s not about a sector but even the rise of a country’s economic capability. Even pop culture sometimes explores this premise, e.g. Crazy Rich Asians, particularly in book two with the discussion about wealth being built in mainland China.
While many of these strategies may not feel accessible to us, at least not right now, there’s nothing wrong with the tried and true techniques of investing early, being consistent, and diversifying your holdings. But hey, it never hurts to learn a little more about the techniques of the wealthy.