How the rich differ from the rest

Article Category: Demographics

By Anthony Keane, 4 September 2008

WHAT is "rich"? Ask 10 people and you will get 10 different answers.

A common definition is a person with at least $US1 million ($1.2 million) in assets not including the family home.

Ord Minnett client adviser Tony Catt says "rich'' should not be used to define a financial state. "I know some very wealthy people who aren't rich in other areas of their life, such as emotional and family,'' he said.

For this article, "rich'' is defined as a person with buckets of money, zero or very little personal private debt and the financial freedom to buy what they want when they want. In other words, very few of us.

The 2008 World Wealth Report by Capgemini and Merrill Lynch found that in 2007, 10.1 million people held at least $US1 million in financial assets.

It found that equity - or shares - was their biggest investment, with 33 per cent of money allocated to this asset class. Fixed income had 27 per cent, cash 17 per cent and property 14 per cent, while only 9 per cent of their money was in alternative investments such as hedge funds.

"Australian shares and property are popular with many of our clients who have substantial sums of money to invest.

"Wealthy people want to preserve their assets as well as keep building wealth. They are patient accumulators of assets that generate solid income. Within shares, it's the blue-chip Australian companies with a good track record of growth and paying dividends that are most favoured.''

International shares and residential and commercial property were other investment destinations, Mr Mackintosh said.

Founder of Money 100, Peter Grey said wealth was "mainly the result of hard work, perseverance, planning and, most of all, self-discipline''. He said common characteristics of wealthy people included:

*LIVING well below their means all their lives.
*ALLOCATING time, energy and money to increasing their wealth.
*BELIEVING that financial independence was more important than displaying a high social status.
*THEIR parents did not provide financial handouts.

"They are extremely focused and passionate about their business or occupation and about earning strong income from that. They are also driven to live within their means, which enables them to invest on a regular basis,'' Mr Grey said.

Hood Sweeney's Mr Rowe said there was no "simple magic bullet'' available only to rich people that was not available to others.

"I think the real answer to the question about how people become rich is - in my experience - because they have a business idea that they then turn into reality.

"They have the courage to start their business when others want the comfort of a pay cheque, they take calculated risks and they work damn hard to achieve their goals.''

Structures such as discretionary trusts - also known as family trusts - self-managed super funds and private companies were common tools.

A strategy that many home owners can follow is using their home as a building block for wealth. "One thing becoming more popular is taking advantage of the equity in the home for gearing,'' Mr Hender said.

People can use their home as security to borrow to invest in assets such as property, shares and managed funds, as long as it suits their risk profile.

Financial Planning Association SA chapter chair Kerrin Falconer said wealthy people were not immune to failure. "While they have the cushion of existing wealth to absorb the failures, it is also their attitude that helps them continue to build wealth despite a downturn or a failure,'' she said.

"They usually learn from their mistakes." "They analyse the situation, learn and go from there."

Ord Minnett's Mr Catt said wealthy people typically used direct investments for shares and property. "Not just residential property - it's also commercial properties and industries properties,'' he said.

"It's the tax control they want. They much prefer to control their own tax destinies.''

Wealthy people were much like everyone else in that they wanted value for money and good returns "without shooting the lights out'', Mr Catt said.

"And they get upset as much as everyone else with underperformance,'' he said.

"However, they have been through market cycles more and expect bad times. They don't do things with their heart - they react with their head.''