How Millionaires Invest Their Money (1, 2, 3)

Posted on September 4, 2012 at 12:19 PM PST by

There’s a lot of research out there about how millionaires invest their money. Stacks of books and whitepapers. Here, in the simplest form, are three fundamental thoughts about how millionaires invest their money.

It’s not a definitive formula, but for the beginner it’s a good starting point. And, as you’ll realize, these three ideas are really more about the mental process of how millionaires invest their money than about what to buy or when.

Millionaire Idea No. 1: Give up on ‘figuring out’ the market. Steve Siebold spent decades interviewing millionaires for his book, How Rich People Think. His conclusion: How millionaires invest their money is largely about accepting that markets are people and that people are plainly irrational. Rather than fight irrationality with logic, millionaires go along with it.

“The rich know that the primary emotions that drive financial markets are fear and greed, and they factor this into all trades and trends they observe,” Siebold writes. “This knowledge of human nature and its overlapping impact on trading give them strategic advantage in building greater wealth through leverage.”

Millionaire Idea No. 2: If you’re emotionally invested, watch out below. You’ve seen gambling addicts froth and churn as the long-shot filly enters the backstretch. You’ve almost certainly been in a big crowd of sports fans as the winning shot beats the buzzer or the crucial field goal drifts wide right.

That kind of excitement can be fun, but you know for a fact that the gambler and the sports fan have zero impact on what happens in the game. They are merely observers. “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring,” the legendary hedge fund manager George Soros once said.

Should you disengage and ignore your money? Of course not. But believing wholeheartedly in a given outcome is setting yourself up for heartbreaking failure and makes you prone to all sorts of bad choices. Don’t fall for it.

Millionaire Idea No. 3: Investing is as much about inaction as taking action. Investors are conditioned to expect trading in their accounts, to the benefit of brokers who collect commissions hand over fist. Doing nothing is the key, says Jack Bogle, founder of the Vanguard Group.

“What advisers have to do is respond to events. Activity is something investors expect,” Bogle told USA Today in an interview. “I was talking about buy and hold to some investment advisers, and one said, ‘I tell my investors to do this, and the next year, they ask what they should do, and I say, do nothing, and the third year, I say do nothing.’ The investor says, ‘Every year, you tell me to do nothing. What do I need you for?’ And I told them, ‘You need me to keep you from doing anything.'”

Learn how millionaires invest their money

You can learn to be cool under fire; you can learn how millionaires invest their money. The tools they use are available to even novice investors and are easily affordable. You should pay competitive rates for individualized insurance or tax advice. But portfolio design and a powerful asset allocation can be replicated at a much lower cost than you might expect.

A good start would be understanding the basics of world-class asset allocation strategies, proven tools that put the power of “doing nothing” in your hands.