With the governments printing more and more money, the common sense would be that everybody should have enough money, right? Wrong, somehow the rich are becoming richer. In this article we will take a look at how the top 1% is investing their money. After this you can either hate the rich or try to do the same. I would say: if you can not beat them, join them.
The Rich Approach
In an interview Morgan Stanley explained that most of his customers are borrowing money. If you are familiar with the name Morgan Stanley, then you know that his clients are very rich people. This brings us to the question: Why are rich people borrowing money?
The answer to this question is very interesting. By taking up a loan it allows them to still control their wealth and assets and still accumulate new assets. They are doing this by borrowing against their assets which allows them to borrow the money they need. This way they are not selling their underlying assets and they can invest into new assets! Pretty clever if you ask me.
If we think about traditional investing there is buying stocks crypto or real estate. Mortal people like you and me think of them as things that we can hold for a few years and when the time is right we will sell them to make a nice chunk of profit. That is the traditional path to wealth that I thought was the way to be wealthy. But now that I am starting to educate myself (and I am not even close to be away from the beginner’s level), I am learning that this is not the way to manage and control wealth.
Buy Borrow Die
Let’s look at the technique that the rich are using in a little bit more detail. Their approach goes a little bit like this: Buy, Borrow, Die. In traditional finance the buy phase is often called the accumulation phase. I assume that everybody reading this is some sort of in this phase and this is also the phase where most of the people will spend their lives in. In this phase people are meant to go to school, educate themselves, get a degree or/ and a high paying career (or/and because I think it is not necessary to have a degree to get a high paying career). With this earned money people are supposed to buy up assets.
With this being said, there are different asset classes that exists, and I think we should talk about them as well. I like to differentiate into 3 to 4 asset classes. These are Stocks, Real Estate, Crypto and the fourth one would be Businesses. But because Businesses are a little bit vague for me we keep it with the three aforementioned ones. Furthermore, there are several other asset classes but to keep it simple we will focus on these three. Each of these assets represent a different benefit to the strategy we are about to investigate.
Starting with Real Estate, the advantages of it are pretty clear. It is a stable asset that can generate you a fixed cashflow (if you rent it out), it preserves its value most of the times and it can be used as a tax write off. The most important thing is though, that people can borrow money against it. The same goes for stocks. If you are investing a certain amount of money each month into your portfolio, at some point your portfolio will be worth a certain amount. This amount can be used to borrow money without actually selling your stocks in the portfolio. Of course, same goes with crypto. The takeaway from this step is that the rich never sell, they accumulate.
So why is this so interesting? This brings us to the next step: Borrow. Instead of selling these assets and getting hit with capital gains taxes, the rich just borrow money. This is done by a securities backed line of credit. This allows the asset holder to borrow something between 50-100% of the asset’s cash value at a very special interest rate. The special interest rate is most of the time lower than the interest rate that normal people would pay because this loan is already backed by the underlying asset! This means that if the borrower can not pay back the rates, the bank can take the asset and is therefore, secured. Whereas if a normal person would take a loan, the bank takes a higher risk and therefore demands more money in the form of higher interest rates. This way the rich can borrow money at a very low interest rate and invest it into something where the return can beat the interest rate over time. That is essentially how the rich are able to become richer each year.
The last step in this strategy is: What are you doing with all of this wealth when you are dead? I know this should not be a big concern because you wouldn’t be alive anymore but if you want to pass your wealth on to your family, this step should be very important. Here, the rich don’t sell their assets and just give the money to their families. What happens is, the rich put all their accumulated assets into a trust which is then inherited by the family at a “stepped up cost basis”. This allows the family to keep those assets without paying too many taxes and just continue the cycle of this strategy.
Risks
As usual, there are some risks with this strategy. The biggest risk is when the underlying asset loses its value. The problem then will be that the bank has nothing to fall back on. That means that if the underlying asset will drop below a certain value, the investor will be forced to sell this underlying asset and therefore loose this asset. Now imagine, the investor would be over leveraged to an insane degree. This would mean that he would have to sell everything and at the end would have nothing left. In my opinion this should be one of the most important things to consider and only use assets as collateral that are very stable in value.
Conclusion
For me it was very interesting learning about this method because until then I really thought that I have to sell my portfolio at some point. This also puts another perspective on the rich. While I am pretty certain that not every rich person is the finest one and got their wealth on a legal way, I do think that this strategy explains why the rich are getting richer. What do you think? Are you willing to try out this method if you have some underlying assets?
Published by ga38jem on
Publish0x|LeoFinance|Steemit|read.cash
On 5th November 2021
Sources:
https://www.forbes.com/sites/jackkelly/2020/07/22/the-rich-are-getting-richer-during-the-pandemic/
https://www.investopedia.com/terms/s/stepupinbasis.asp
https://www.valueresearchonline.com/stories/49587/buy-borrow-die/