One of the most common ways people aim to build wealth over the long run is through investing. Putting money into the market through investments like stocks, bonds, real estate and more with the goal of seeing returns that outpace inflation seems like a surefire strategy to eventually become financially independent or even rich. But is investing really a reliable path to achieving rich status? Or is living comfortably the more realistic goal? In this article, we will explore some of the factors that determine whether ordinary investing alone can truly make someone rich.
For many people, stock market investing is the primary vehicle they use in hopes of achieving outsized long-term returns. On the surface, historically the stock market has generated average annual returns of around 7-10% over long periods. If one were to receive returns near the high end of that range for decades by investing consistently in low-cost stock market index funds, it’s conceivable they could turn a six-figure portfolio into a multi-million dollar balance sheet within 30-40 years. However, there are a few challenges with relying on stock market gains alone to achieve rich status. For one, those average annual returns hide a lot of short-term volatility – there is no guarantee your portfolio won’t suffer significant losses for periods of 5-10 years that detract from longer-term progress. Another issue is that stock market returns, while positive over the long run, may realistically deliver more modest 5-7% gains on average after accounting for inflation. At those rates, it would take decades of maximum contributions just to amass a million-dollar portfolio. So, expecting the stock market to make you rich via investing single-handedly is a long shot.
Owning rental real estate is another popular way individual investors try to generate wealth over the years. Not only do property values generally appreciate, but rental income streams can supercharge returns if properties are selected and managed well. On paper, the numbers seem to add up – purchase a single-family home, collect rents that cover the mortgage while also seeing several percent in annual appreciation, and do this repeatedly to build a large real estate portfolio. In reality, being a landlord is not passive income and comes with significant responsibilities like maintenance, repairs, vacancies, and dealing with tenants. Leverage from mortgages also amplifies both potential returns and risks as well if the real estate market sours. Many who attempt real estate investing at a large scale find it more challenging than anticipated to balance investments, oversee operations and still have time for a full-time job or career. So while real estate can be profitable for some, relying on it alone to attain great wealth through investing often proves difficult in practice.
Venturing into private business ownership through either starting your own company or investing in other entrepreneurs’ ventures offers perhaps the best odds of generating truly outsized returns that could result in becoming rich. After all, the vast majority of ultra-wealthy self-made billionaires built their fortunes through successful business ownership, not strictly through public market or real estate investing. However, business investing also carries significantly more risk than traditional asset classes. Most new businesses fail, and even successful ventures encounter unforeseen challenges that threaten their survival. Generating consistent profits, let alone hyper-growth, is incredibly difficult. The time commitment needed is also generally immense. As such, very few ordinary individuals achieve true riches by putting money to work in private businesses – it takes a special blend of skills, connections, opportunities, work ethic and plain good luck.
Despite the challenges, it is indeed possible for committed long-term investors to attain levels of wealth that could be considered rich through a combo of public and private market investments and real estate. How millionaires invest their money? According to research, affluent individuals with over $1 million in investable assets usually keep a Core-Satellite portfolio approach. This centers around a baseline of low-cost stock and bond index funds for steady, tax-efficient returns. Then, 5-20% of the portfolio may be dedicated to higher-potential yet riskier places like actively managed funds, private equity, start-up investing, commodities, venture capital and special situations to diversify while augmenting long-run upside. Finally, 5-30% may flow to hard assets like real estate, collectibles, small business stakes and natural resources that double as both an inflation hedge and potentially income-generating ventures. By blending lower-risk core holdings with supplemental upside vehicles, millionaires seek to preserve much of their wealth while retaining upside chances to multiply it considerably over decades.
In summary, becoming truly rich solely through regular investing is far from guaranteed and usually isn’t a get-rich-quick scheme. However, with disciplined contributions made consistently over a lifetime paired with a diversified portfolio spanning public and private markets plus real assets, the odds definitely tilt more towards the possibility of accumulating wealth that could be viewed as rich for most households. The keys are patience to allow compound returns to work magic over many bull and bear cycles, as well as discipline to regularly rebalance and not abandon the plan during inevitable downturns. Anyone investment approach – whether pure stock picking, real estate or private business deals – poses too much risk if relied on as a single ticket to riches. A balanced, long-term focus treating investing as a marathon and not a sprint provides the best probability of achieving the American dream of financial independence or more through maintaining successful portfolios over decades.