It’s easy to assume that all wealthy people invest the same way, but a recent Bank of America survey found a big difference between where older, affluent people put their money and where their younger counterparts invest.
Many young, wealthy investors invest 31% of their assets in alternative investments such as hedge funds, private equity, and cryptocurrencies.
Here’s how the wealthy differ in their investment strategies and how to get started investing, no matter your income level.
Rich, young investors opt for alternative investments
The Bank of America data shows that rich, young investors are opting for different investment vehicles than older investors. Here are the top five ways they allocate their money:
- 17% in alternative investments (hedge funds and private equity)
- 14% in crypto
- 28% in stocks
- 19% in bonds
- 19% in cash
In contrast, older wealthy people diversify their portfolios less, with more than half of their investments in stocks, just 5% in alternative investments, and only 1% in crypto.
Another interesting finding in the survey involved optimism about the economy. Young, wealthy investors are twice as optimistic about the economy as older investors.
Your investments can earn significant returns even with traditional investing
While knowing how wealthy people invest their money is interesting, you don’t need to follow their strategies to build your own nest egg. Taking a few simple steps now can help you grow wealth over time.
Here’s how to get started.
1. Sign up for your employer’s 401(k) matching program
If your employer offers a 401(k) and has a matching program, it should be an easy call to sign up for it. Let’s assume your company will match 50% of your contributions, up to 3% of your salary. If you make $75,000 annually and contribute $4,500 to your 401(k) annually, your employer would contribute $2,250 each year — that’s free money!
2. Open an IRA
If you don’t have access to a 401(k), or even if you do, opening an individual retirement account (IRA) is a great idea. You can choose a traditional IRA or Roth IRA (both offer tax advantages), with a traditional IRA allowing you to make tax-deductible contributions. In contrast, a Roth IRA allows you to make tax-free withdrawals in retirement. For 2024, you invest up to $7,000 into either IRA type or $8,000 if you’re 50 or older.
3. Open a taxable brokerage account
There’s one thing that wealthy investors, young and old, have in common — a large portion of their investments are in stocks. You can do the same by opening a brokerage account and buying individual stocks or low-cost funds tracking the S&P 500.
While you can lose money in the market, and there will be volatility year to year, the annual historical rate of return of the S&P 500 is 10.2%. Even if you earn a more conservative return of 8% annually, just $2,000 invested annually could turn into $91,157 in 20 years — even if you start with just $0 in your account!
Thankfully, investing exactly like the wealthy isn’t necessary to build your retirement portfolio. Starting as early as possible and consistently contributing to your investment accounts will help you build wealth — no inside scoops on private equity investments required.
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