Most people think of wealth as being made only from investing in the stock market. While many investors do successfully grow a stock portfolio over time, you’ll find that most high net worth investors make wealth in other ways.
Wealth is commonly made from significant income increases, company bonuses, increases in the value of assets owned, receiving and growing an inheritance, or investing in traditional stock and bond portfolios. The time frame varies among each. Then more wealth is made by combining skills and existing capital, or savings, attained from any of these endeavors so that capital compounds, and continues to do so.
In this post, I’ll address each of the methods for building wealth in more detail.
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Wealth from Traditional Investing
Traditional investing involves following a buy and hold asset allocation template to invest set percentages in stock and bond funds for decades. Sometimes alternative assets such as commodities and real estate are added to the portfolio mix.
A typical portfolio template may have, for example, 70% in various stock funds and 30% in bond funds. These funds may be index funds or managed funds that choose individual securities and may be bought directly by an investor. Alternatively, the funds may be bought by a financial advisor for an investor.
Time required – Several years or decades
The number of years required for wealth to be made from this method depends on
- Investment capital
- Desired level of wealth
- Rate of saving and investing
Many investors don’t realize that success depends on larger, or macro factors during your investing years, such as:
- The economy
- The global economy
- Federal Reserve actions
- Financial markets
Note these macro factors are all beyond our control. This is what makes traditional investing in stocks and bonds harder to estimate in planning for our financial futures.
Time Required – Fast: Days, weeks or months
Note in the case of inheritance, someone else, usually a family member, probably made wealth using one or more of the five activities here.
The challenge with an inheritance is that wealth often passes to individuals with little to no experience managing it. Consequently, people who inherit money usually turn it over to a financial advisor to invest because they’re not sure what else to do with it.
There are also many subconscious issues around inheriting money that create the desire to turn the management over to someone else for fear of losing it.
Regardless, generational wealth often provides the capital for more wealth to be made.
Large Company Bonuses
Time – Years then days
Many companies pay bonuses to employees. The bonus level depends on the employee’s level. Bonuses can provide an excellent foundation for making more wealth.
Increase Income Significantly
Time – Many months or a few years
Wealth can be made when you create an income increase big enough to significantly increase the amount you save. This is usually from business ownership or high paying careers. While it’s tempting to spend increased income, this method is especially powerful when combined with lowering expenses so the income increases can be invested.
Increase in Asset Values
Time – Months or years, depending on the strategy and the cycle
This can occur from an increase in value from a partially or completely owned asset. The most common assets for individuals are:
- Real estate investment
- Stocks well chosen (and at the right time)
While such an asset value increase is reflected in net worth, until the asset is sold, and taxes are paid on the sale, the wealth obtained is not certain.
Again, Most people think wealth is made from …
investing in stocks and bonds. They often believe that if they
- Hire the right financial advisor
- Pick the right stocks
- Find the best asset mix (allocation)
- Save enough
…they will become wealthy.
While it can and does happen, wealth accumulation from traditional investing is very slow and depends on macro factors beyond our control.
Even so, this is how most people grow their savings. This is what investors are taught is the right thing to do based on what has worked well in certain past decades.
Most investors, however, never reach true wealth with a traditional saving and investing model.
As a result, they are forced to cut costs, and “get by” because this is what the masses are encouraged to do in the media and usually well meaning financial advisors and wealth managers.
(There is also guilt or shame around wanting or deserving wealth, subconsciously driving people to self sabotage, but that’s another topic:)
The Opportunities to Create Wealth
Fortunately, more and more every day people are seeing the possibilities to truly create wealth, thanks to the increase in information about alternative assets and investment strategies that were only available to high net worth investors and financial institutions in the past.
Also, small businesses can be tested with no capital, as we can see from Shark Tank, YouTube successes, and online businesses annoying us with ads constantly:)
A relatively low percentage of people choose to use the other methods to gain more wealth, or wealth faster, however, because most people do what everyone else does because it feels right and safe.
Or they simply don’t know.
Or they don’t believe they can do something else (even though millions of people already have which discredits this as a valid reason).
It’s very important to note that I am not against stock and bond investing. I invest in both for our core portfolio.
I do, however, think it’s important for everyone to be aware of the limitations and risks of traditional investing in stocks and bonds to attain wealth.
From this place of knowledge, someone can hire a financial advisor should they choose, or invest their own portfolio.
It is not hard to invest a diversified portfolio in stocks, bonds, real estate, and commodities.
A core portfolio invested in such traditional assets can passively build wealth while other alternative methods which require more time and attention are implemented, if desired, or if a traditional portfolio simply won’t create enough wealth to allow you to live how you want.
What Is the Fastest Way to Build Wealth?
As you can see from the time frames provided above, the time it takes to build wealth varies based on the method used as well as macroeconomic factors.
The fastest way to build wealth in which an investor has more control is from increases in asset value. Such an increase occurs most often from stocks or real estate. This method can work particularly well during strong increasing markets.
Even online businesses are now being bought, improved, and sold short term resulting in building wealth fast.
How Do I Start Creating Wealth?
You’ll find that many financial coaches and online articles suggest avoiding debt or cutting expenses to create wealth. These are really personal finance strategies that may help save a little more money to invest, not truly create wealth.
The best way to start creating wealth is by discerning the best opportunity for you personally based on your skills and your existing savings, then acting upon that opportunity.
As you can see, wealth is made in different ways. Some methods require more time and capital than others. By using one or more strategies to build wealth, however, the results can be dramatic vs simply cutting out lattes and investing in stocks over the decades.