How do most millionaires make their first million?

I often write answers on Quora, where I am the most viewed writer for investing, wealth and personal finance, with over 231 million views in the last few years.

On the answers below, taken from my online Quora answers, I focus on a range of topics including:

  • How do most millionaires make their first million?
  • Has the stock market really changed compared to ten years ago?
  • Do attitudes differ between wealthy and non-wealthy people?
  • Interest rates are 0%. How can retirees invest?

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How do most millionaires make their first million?

It depends on the individual, and also location. The most common ways are:

  1. Through businesses
  • In most developing countries, this is a very common way, as high-paid salaried positions are still rarer.
  • In developed countries, business owners dominant the ultra-high-net worth categories (say $30m and above), but a salaried earning is actually more likely to become a millionaire than a business owner. One reason for this is that there are more accountants, lawyers and teachers than business owners, so even if a small percentage of them invest from a young age, there are millions of millionaires from salaried backgrounds

2. Salaried employees

  • Mid-level managers are the most likely people to become millionaires in some countries, such as the US, and 14% of the world’s millionaires are said to be teachers
  • It might be the “get rich slow” route, but it is a misconception that most millionaires are high-income or necessarily business owners.
  • In addition to that, consulting, some jobs in Silicon Valley and finance, can result in people building their first $1m more quickly than expected
  • One of the major reasons why salaried employees can become millionaire is you don’t necessarily have to invest $1m of course, as the capital appreciation of assets can take care of that. So in reality, a salary + investing is the key for many of these people, in the same way that many business owners also have private investments.

3. Investments

  • Private investments are one of the biggest contributors to wealth creation
  • This relates back to the first two points, as investments allow people to compound their original investment size from an income or business.

4. Luck

  • Inheritance
  • Marrying into wealth
  • Winning the lottery or some other unlikely event
  • This isn’t as common as before though. Most wealthy people didn’t inherit money in the majority of countries
  • This depends on the region/location though. In some areas, like the Middle East, inherited wealth is still high.
  • This quote says it all:

What will be interesting is whether these things change. In the coming decades, we might see an increase in business owners who become wealthy, and less salaried employees, as the world changes around us.

Where would a retiree with limited funds invest with minimum risk? The stock market carries high risk and interest rates are lost to zero.

You are right in saying that interest rates are close to zero in most parts of the world.

Likewise, you are correct in saying that for retirees, the stock market is riskier than for younger people.

Owning the stock market isn’t that risky for those who can do so for decades.

In fact, nobody has ever lost money doing that:

Being 100% in the S&P500 as a retiree doesn’t make sense though. What makes more sense is a 60%-40% portfolio – 60% in stocks and 40% in bonds.

You can see quite the difference in the stats below:

Studies have shown that if you have a 60%-40% portfolio, you can withdraw at least 4% per year in income adjusted for inflation – so $40,000 from a $1m pot as an example.

This rule has held up even during extreme moments like 2008–2009 and during various other crashes.

It isn’t perfect. Bonds don’t pay as much any more, but it is the best risk-adjusted strategy, provided you stay calm through any stock market storms.

Also avoid picking individual stocks as a retiree. It is much riskier than owning the market, especially when you don’t have fresh money coming in.

Any other strategies hold just as much, if not more, risk. Real estate, REITS and commodities all hold just as much risk, if not much more in the case of commodities.

At least this one is tried and tested over a long period of time, and ensures you have your eggs in different baskets.

Which ones are the most common attitudes among rich people, and why?

I can remember I used to know one or two people who worked on airlines.

One day in a social setting, they mentioned how they dealt with many wealthy customers.

One person in the group mentioned how the wealthier customers must be more demanding and arrogant.

That is the image we are taught. Yet the people responded that they find the wealthier customer, on average, to be more polite than the average despite the exceptions they have seen.

This shows that many of the attitudes the public hold are wide of the mark.

Apart from that, I have seen many of these commonalities, many of which are contrary to popular views and opinions:

  1. Trusting. Believe it or not, people who are wealthy are more likely to be trusting in my experience. That doesn’t mean being naive though. There could be many reasons for this. Wealthier people tend to be older, and experience can teach you that most people aren’t bad – only a minority are. Secondly, if you are in business, you actually deal with people, as opposed to letting the media shape the narrative. If you are a salaried employee who comes home to doom and gloom on the news, you are more likely to get influence by that.
  2. Attitudes to risk – People who are wealthier, or for that matter those who plan to become wealthier, tend to take calculated risks, rather than taking too much or too little. Often the attitude is that doing nothing is just as risky, or more risky in some cases, than doing something. Most people are more likely to experience more pain from a loss, than pleasure from a gain. This stops most people taking chances

3. Care about specialization . Even though this is changing, many people are still reassured by big brand names and multi-nationals. Plenty of wealthy people prefer to deal with boutique firms that are specialized in a niche, as they can better serve specific needs. What recruitment firm is likely to be better for a business – the biggest recruiter in the world or one that is specialized only in your niche? The answer is obvious. The same is true for legal and financial firms. Many larger financial firms have hundreds of thousands, or even millions, of smaller clients. Many specialized ones have a smaller group of wealthy, or high-income at least, clients.

Everybody is different though, and no groups are monolithic.

4. What can my money earn me – not what can my money buy me. It is impossible to stay wealthy if the focus is always on how to make and spend money, and not how to manage it. Most people are more likely to think “well I could die tomorrow, so live every day as it comes”.

5. Try something new. In business, regardless of whether you are the consumer or the owner, there is success to be had in doing things differently, and not just following what everybody else is doing. When everybody else is doing something, that means the competition is higher.

6. Taking personal responsibility. Taking personal responsibility and only trying to control what you can control, makes sense. What makes more sense? To go on a political march and demand change, or start by trying to change your own life? The answer is obvious. Blaming other people for failures is pointless. COVID-19 has shown that again. Many business owners said “we can’t trade due to COVID-19”, and started lobbying governments for handouts. Others are doing record business as they adapted.

A final one would be a strange mix of patience and impatience. Delaying gratification is one of the keys to success.

Yet most successful people are impatient for success, but are willing to be persistence and play the long game if needed.

How is the global stock market today as opposed to ten years ago?

It is ironic you speak about the stock market ten years ago – in 2011. Do you know w

It is ironic you speak about the stock market ten years ago – in 2011. Do you know what the biggest stories of 2011 were in financial markets and investments more generally?

Well:

  • Markets could be overvalued, especially if the recovery in GDP growth keeps accelerating
  • Markets could fall due to the 2012 election
  • Inflation could become a big issue as oil and commodity prices are rising
  • People should put their money in gold and silver
  • People should put their money in emerging market currencies linked to the BRIC countries.
  • The USD could crash

Sound familiar? It reminds me of the 2020 US Election. The same people who were shocked by markets skyrocketing after Trump’s unexpected victory in 2016, were equally shocked by the fact that markets increased after the 2020 election was uncertain for days.

The same people who were shocked by markets rising during Covid-19 and lockdowns, were the same people who were surprised when stocks rose during the 2018–2019 government shutdown.

That doesn’t mean that stocks always rise of course. Any amateur knows that whilst stock markets have risen incredibly long-term, there are many crashes and corrections.

The point is, the media exists to sensationalize. They wouldn’t be as profitable if they just gave the advice that the likes of Buffett give – just buy and hold forever and don’t care about what happens in the middle.

Just look at some news stories and predictions in the last ten-fifteen years

And I could go on and on and on. The point is, ignoring the hype and the media works in 2021, just as it did in 2011.

Some things have changed “out there”. More people are on social media. People therefore worry even more about crashes than before.

The Reddit and GameStop story shows an interesting new trend. Yet the fundamentals of good investing remain the same.

The stock markets are similar to ten years ago – just worth more. Pretty much the same as most ten-year periods.

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Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 231.2 million answers views on Quora.com and a widely sold book on Amazon

Further Reading 

In the article below, taken from my online Quora answers, I spoke about:

  • What is a good investment strategy during high inflationary periods? Commodities, stocks, bonds or real estate?
  • Is it really true that very rich people, such as Mark Zuckerberg, are very frugal, or is that a misconception? What could motivate people like that?
  • What do I wish I had known at age 19-20, including in business, investing and life?
  • How can you get rich quickly through an online business, or is the slow approach better?

To read more click below:

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