Today we continue to review the findings from my first 100 millionaire interviews.
Before we proceed, let me know if you’d like to do a millionaire interview. I’m always looking for more millionaires to learn from.
To get everyone on the same page, here are the posts we’ve already done regarding the first 100:
- Findings from 100 Millionaire Interviews: The Numbers
- 13 Surprising Facts from 100 Millionaire Interviews and What We Can Learn from Them
- Millionaire Stories: How 7 Everyday People Became Wealthy and What We Can Learn from Them
Today we’re going to focus on millionaire investing habits. I’ve reviewed all the responses and complied nine learnings that seem fairly consistent.
Millionaire Investing Questions
Before we get to the details, let’s review the investing information I collect.
Obviously the interviewees discuss all sorts of financial details as they answer my questions, but there are three that relate specifically to their investing efforts.
- What is your investment philosophy/plan?
- What has been your best investment?
- What has been your worst investment?
Add in a sprinkling of other questions where investing pops up now and then and the information shared is quite enlightening…
Nine Keys to Millionaire Investing
Here are the top investment learnings from these millionaires.
In addition to my findings and commentary I have added in direct quotes from millionaires (along with links to the interviews in case you want to read more for yourself). Why should I explain what they think when they can do it themselves? 😉
1. They prefer their investments to be “simple”.
When I was a kid I used to think millionaires had complex investment strategies using off-shore bank accounts, tax-sheltered plans, and a host of other over-the-top investing efforts that the rest of us weren’t privy to.
No doubt some wealthy individuals do like to complicate their investing, but not most of the millionaires I talked to. In fact, they like things “simple.”
Just look how often they use that exact word in describing their investments. We’ll begin with Millionaire 38:
I try to keep things simple.
I don’t try to time the market, I invest regularly regardless of what the market is doing. It’s a sprint, not a race.
I try to diversify as much as I can with a mixture of ETF’s, small-mid-large caps, bonds, stocks, etc.
Here are similar thoughts from Millionaire 48:
Overall, I’m a Boglehead at heart with a soft spot for real estate but an aversion to the extra work it usually produces to achieve superior returns.
I have a simple three fund portfolio. It is hard to justify working on anything besides medicine since that produces my highest hourly wage.
If I can work more hours and make those dollars work otherwise passively like in index funds, I feel that is the best use of my time.
Millionaire 79 likes simple investing as well:
I’m pretty simple when it comes to an investment philosophy.
I would like us to purchase up to ten investment properties, with most of them coming through work.
I will pursue investments as much as possible at work, with a potential to invest up to $1 million to $2 million in opportunities that underwrite to a 20% annual return.
With our tax deferred savings account, we’ve invested with a third party money manager who invests across a diversified spectrum of investments.
And finally, Millionaire 87 cuts right to the point:
Keep it simple, keep fees low, and don’t try to time anything (total Boglehead at this point.)
These millionaires don’t want to spend a ton of time and effort on their investments.
They want them simple, hands off, easy to manage, and to produce decent returns.
All of these lead us to the next logical step in millionaire investing…
2. Everyday millionaires prefer index funds.
Low cost stock index funds seem tailor-made for the sort of investing millionaires prefer.
So it’s no surprise that time and time again millionaires mention index funds as their favorite investments.
Here’s a sampling of their thoughts starting with Millionaire 63:
I’m no genius, I can’t predict the markets, and I don’t enjoy following the market.
For that reason I used the VTSAX index fund for the majority (95%) of our investments.
I love the fund’s low cost (.04%), diversification, and simplicity.
And some comments from Millionaire 14:
The power of compound interest is truly amazing – it took me 8 years to save my first $100K in my 401K, now I earn that in 3 months.
I have learned over the years that low cost index mutual funds are the way to go if investing is not your hobby – all our contributions now go to index funds.
Millionaire 26 adds this:
Our entire net worth is in mutual funds, mostly Vanguard low-fee index funds: 45% in the S&P500 (VFIAX), 30% in small and medium cap companies (VEXAX), 15% in corporate bonds (VWETX), and the rest in non-US stock funds and US government bonds.
And finally some thoughts from Millionaire 60:
I have a lot of friends and relatives who think that being a good investor means calling market turns and picking winning stocks. Whatever the opposite of that philosophy is – that would be me.
I favor diversification and low management fees. I never try to time the market or pick the next hot stock. I primarily invest in index funds.
I could go on with multiple examples but you get the point.
Millionaires love index funds for all the reasons noted above — they are simple, easy to manage, and produce good returns given their low expenses. What’s not to love?
3. Most millionaires do not like individual stocks.
This isn’t to say all dislike buying company stocks or that even those who use mostly index funds don’t own some individual stocks, but in general, millionaires don’t favor buying individual stocks.
There seems to be a couple of reasons for this.
First, buying and managing individual stocks takes a lot of time and effort — the opposite of what millionaires prefer in their investment selections.
Second, like most people, they aren’t very good at it. In fact, many list buying individual stocks as their worst investment.
Here are a few examples where millionaires named their worst investments, starting with Millionaire 64:
Buying individual stocks. I don’t do that anymore!
Millionaire 66 echoes these feelings:
My husband made early attempts to dabble with individual stocks and options…though that was probably more akin to speculation.
And finally some thoughts from Millionaire 94:
Several individual stocks over the years have lost money for me. Some made a profit, but overall individual stock trading did not do any better than my index funds.
I played the market and actively bought and sold stocks over the years.
In the end however, long ignored boring 401ks invested in mutual funds outperformed all my stock trading, with a lot less stress. In general, I have given up on trading individual stocks.
Eventually these millionaires (and most of the others we talked to who tried buying individual stocks) realized that trying to beat the market is a fool’s game. That’s when many of them turned to index funds.
This mirrors my story as well. Once I learned that I was not the next Warren Buffett (an expensive but thankfully short-lived time period), I turned to index funds and never looked back.
4. Real estate is a vital investment for many millionaires.
I asked some of my real estate expert buddies from Twitter if there were any good estimates of what percent of U.S. investors invest in real estate.
Apparently there are not any solid numbers, but Mindy from Bigger Pockets said her best guess was 10%.
Millionaires are at three times that rate.
Since I changed questions to focus on millionaire investing a bit more, 21 of 63 responses from millionaires have included real estate as part of their investment plans.
Here are some of their direct comments on real estate, starting with Millionaire 83:
I own three daily beach rentals that contribute $35-40K/year – of which I spend less than an hour/week managing.
I own some commercial real estate that adds about $15K/year that I also spend zero time on.
For my holiday rentals, I had a friend who had successfully grown his number of owned rentals over many years, but stretched his borrowing to the limit. Through one of my stock portfolios, I had access to cheap short-term borrowing. I also worked in advertising/marketing.
Through our partnership, we were able to leverage several additional rentals and then successfully market them to higher capacity rentals. This allowed us to quickly pay off the loans, let us earn higher incomes, and watch the values of our rentals continue to increase.
My partner and I continue to search for additional rental unit and commercial real estate opportunities.
Millionaire 93 had similar thoughts:
Real estate investing has been our biggest and most fruitful side gig…though I’m not sure I can call it a side gig since my wife is now a Realtor and we earn as much if not more money from real estate than we do with my full time job.
Anyhow, we started getting into real estate investing after my wife and I bought our current house together 5 or so years ago after getting married and just before our son was born.
At the time we each owned our own houses and decided to rent those and buy our new house together. We both still had mortgages on the other two houses and we bought those near the top of market in 2006.
We were still coming out from under the 2009 crash, but by 2012 the market was looking pretty healthy. We thought that we may as well keep those homes and see if we could gain some equity from them in the end.
That decision combined with a well-timed equity pay-out from one of my former employers put us in the driver seat to capitalize on the next 5+ years of real estate growth in the Portland area. We have since sold those rental properties and bought and sold 8 other homes in the last 5 years for profits ranging from $40,000 up to $80,000 per property.
Our basic strategy with buying investment properties is to purchase distressed properties that can be rehabbed with around $15k – $25k with a profit of $50,000+. We sometimes will rent a fixed up property to someone we know to get past the 1 year short-term capital gains tax.
We also stick to basic homes and condos on the lower end of the market which reduces risk of market fluctuation.
And here’s a short one from Millionaire 77:
I made my first million when I was 37 back in 2011, then my net worth grew quickly once I started doing real estate in 2013.
We’ve talked about the process of building wealth many times. Investing in real estate seems like a natural result once the basics are covered and excess cash is generated.
It goes something like this:
- Person/couple begins with normal job, then works to grow income and/or advance, generating additional, strong career income.
- While doing this they keep their spending under control, creating an ever-widening financial gap https://esimoney.com/the-gap-is-the-key-to-wealth/ between what they make and what they spend.
- They invest in index funds to add even more growth to their finances.
- As this cycle continues and feeds itself, they look for additional sources of investment and real estate seems a natural fit for this extra cash.
It’s an interesting result since real estate is not known to fit the other investment criteria millionaires prefer (simple, easy, etc.) but there’s certainly something about it that draws them.
Again, this was my personal experience as well. Once I built up enough assets to become financially independent (after a couple decades of work), I determined what I wanted to accomplish with real estate, found a mentor to guide me through the process, and bought several properties that have done quite well. Since that time my net worth has almost doubled.
5. Quite a few like dividend investing.
For those that follow the cycle above and begin churning off extra funds but don’t want to dive into the sometimes more complicated world of real estate investing, dividend investing offers a great alternative.
Of the 63 millionaires answering the investing questions, 10 mentioned dividend investing specifically while many more highlighted dividends churned off from equity investments.
That is some took the more traditional effort to invest in dividend-producing stocks (like I’ve discussed in Dividend Investing Basics, Dividend Stock Investing as a Source of Passive Income, and Dividend Investing Will Always Beat a Side Hustle) while others simply receive dividends as their index funds and other investments declare them naturally.
Here are some comments around dividends starting with Millionaire 15:
Total household income is around $440k. $105k of this is passive income through dividends and rental income.
And from Millionaire 82:
I earn about 60 – 80K annually from dividends and interest from my portfolio. That is from saving and investing.
And from Millionaire 83:
Dividends from my investment accounts bring in about $50-60K year.
These are substantial amounts. The millionaires above are earning more from dividends (which are generally minority portions of their earnings) than what the average American household earns from their salaries.
Again, the wealth cycle can be a powerful force if developed and nurtured over time and stuck with for a couple decades or more.
6. Business investments are solid, but less than what I expected.
If you had asked me before I conducted these interviews what percentage of millionaires became wealthy by owning businesses, I would have said something like 25% to 33%.
Of my group, 9 out of 63 (14%) listed a business as part of their financial picture.
This matches what was found in Everyday Millionaires, a survey of 10,000 millionaires which was obviously a much more scientific effort than my interviews. They found that “only 18 percent [of millionaires] owned a business.”
I was surprised at these results, but they are consistent so are at least in the ballpark of being reality.
That said, those who have businesses generally do very well. (Which could simply be those who fail not mentioning their business efforts.)
Here are a couple specific examples from business-owning millionaires, starting with this one from Millionaire 96:
In 2006, a couple friends and I started an internet side business surrounding a growing Internet pastime/hobby. Our concept literally started on top of a pizza box in my kitchen from the question: “We love it, why is no one else providing it?” We have a lot of pride in the fact that we’ve created a thriving site literally from thin air.
But make no mistake, it was a lot of work with little to no income for the first six years. We also took on a Jr. Partner after a couple of years and we’ve now removed the “Jr.” designation.
In 2012, it was obvious there was no end to the sheer number of hours required and we were all starting to feel the pressure as were our families.
We had established a viable site and the community was passionate and growing so we moved to a subscription model and used much of the money to invest in better infrastructure to run the site and, most importantly for all of us, hire independent contractors (many from within our online community) to provide the content that we, ourselves, had been producing.
I’ll always remember that first night where we held our breath and hit the button to convert the site to a “paywall’ model from a free model.
It’s cliché to say, but being an entrepreneur takes a lot of time if you want to do it well. It threw my work-life balance way out of balance but, at least in the early years, in a good way. We’re still running it today but the model has changed such that it’s far more manageable.
We use dozens of independent contractors to do much of the work that we used to do ourselves so the partners can concentrate on strategy and execution.
Best of all, it’s an Internet subscription service so there is no tangible cost of goods or inventory to manage. We simply have to manage our content flow, much like the ESIMoney.com, and ensure our paying members are satisfied with what we are providing.
In our first year (2012) of the subscription model, we earned $29,190 in revenue. Fast forward to 2017 and we finished with $250,000. 2018 should see an approximate 10% growth rate at the top line.
We’ve talked to a few doctors who obviously make good incomes. But those who combine medicine and business like Millionaire 47 do very well indeed:
My first physician job, I was paid $120,000 a year. I worked extra hard and made $250,000 after a few years.
Eventually I decided to stop working for a medical group, and joined another physician in partnership. My salary increased to $400,000.
Finally, I started my own concierge practice and maxed out my compensation at $950,000 a year.
Dang. I wish I had been better at science in school. 😉
7. Relatively few millionaires go for alternative investments.
I expected to see a good amount of investing in art, gold, collectibles, commodities, etc.
There was some of that for sure, but not much really.
And when it was mentioned it was almost always couched as a “hobby” or done with “fun money.”
None of the millionaires I interviewed made their wealth through alternative investments.
This likely is the result of several factors:
- Millionaires are generally conservative and alternative investments are often speculative.
- Millionaires spend most of their time and effort focusing on the basics of growing wealth and alternative investments are way outside of the basics.
- Alternative investments take time, effort, and are generally the opposite of “simple”. Millionaires prefer their investments to be solid, dull, and anything but fancy.
Sure, a few art collections or fortunes in rare coins would have spiced up the interviews a bit, but millionaires prefer to keep things dull and profitable.
8. Their best investments are all over the board.
While index funds, real estate, and dividend investing seem like tried and true fundamentals for millionaires, these investments only sometimes rated as their “best” returns.
When millionaires were asked what investments had performed the best for them there were a myriad of answers including:
- Business school/MBA — Millionaire 44, Millionaire 84
- Flipping Real Estate/Selling Primary Residence (as opposed to real estate investing) — Millionaire 43, Millionaire 47
- Career — Millionaire 50, Millionaire 61, Millionaire 69
- Spouse/family — Millionaire 53, Millionaire 55, Millionaire 59
And being from Colorado I found Millionaire 68‘s response amusing:
Hands down, taking action to invest in the cannabis industry early. It has been life changing.
I’m sure it has… 😉
9. Likewise their worst investments are varied.
Like most investors, millionaires have a laundry list of worst investments. Very few emerge unscathed from finding the investing style that works for them.
Fortunately for them they learned quickly and moved on, supported by solid financial habits in other areas (like earning and saving).
Some of the worst investments listed include waiting to invest, borrowing from a 401k, trusting the wrong people, real estate (some got burned as bad as others had success), individual stocks, penny stocks, day trading, new cars, and so forth.
I’ll share a couple of “worst investments” that stand out from the pack. I enjoyed this one from Millionaire 62:
Most of the 90’s.
Yes, I saved a lot but back then it was all about the watercooler stock tip and/or mutual funds with ridiculous fees.
It turns out I’m not a good stock picker nor am I good at market timing. But hey! Who really is?
I’d pour over Barron’s or whatever like a miniature Warren Buffett to no avail. Some of the companies I’d pick did OK, most did not. I’d have a lot more if I’d either sought or stumbled upon the right advice.
And here’s a warning from Millionaire 93:
Worst investment has been marrying the wrong people (see road bumps) and for me a restaurant business I started with a few friends.
The business took a lot of effort just to break even year to year and I eventually sold it for the value of the equipment and lost my build out costs and tons of time. I did learn a lot and had some fun getting involved in the community but I can’t say it was worth the time or effort.
Millionaire Investing Summary
Those are the highlights of how millionaires invest. Overall my impression is the same I had of their finances in general: they cover the basics and over time it all adds up to a significant amount.
Millionaires don’t try to get fancy in their investments, they simply prefer steady, solid options to help grow their wealth.
As that wealth builds, they might expand to real estate or dividend investing, but they don’t get too crazy.
Many of their best investments are in areas outside of what most people would call “investments” — careers, education, spouses, and one-hit wonders that can’t be replicated.
And while they’ve made investing mistakes, those mis-steps weren’t killers. Millionaires learned from them and then moved on.
All in all this reiterates the fact that the simple path to investing is just as successful as the simple path to personal finances. If you cover the fundamentals, you become wealthy over time.
P.S. For those who prefer a video version of this post, see the ESI Money YouTube channel.