Each event I speak at has a different audience, and it’s great to meet them individually and get a wide perspective on everyone’s background, current careers or business interests, and future goals and aspirations.
No two people are alike, but most investors can be categorized into three different categories depending on the stages of their careers and investment objectives.
Those in the first group – investors first starting – seek high-growth opportunities and get on the ground floor of the next big thing. Wall Street and crypto exchanges are always catering to this group. The crypto exchanges have even made a big push lately with celebrities. Matt Damon has been shilling for crypto.com with his buddy Tom Brady promoting FTX.
While relatively new investors are quick to jump on the latest and greatest hype machine, seasoned investors – typically older, wealthier investors – take a more measured approach. They need to be quicker to adopt new opportunities – preferring to stay with what’s tried and true.
So, you have the beginners and the veterans. Then there are the in-betweeners.
Here’s how each level approaches investing:
Level 1 Investors
These investors are coming swinging out of the gates. Everywhere they turn, they’re told that they can get rich overnight. So, these investors are trying to build wealth faster or as quickly as possible. They’re trying to break the chains of their jobs, overcome debt, and take more time off to spend with their families.
Level 2 Investors
These investors have successfully built some wealth and have intentions to be in a position to leave their jobs if they choose to. Their hope is also to accelerate the retirement timetable. They want to enjoy their free time with their families and do the things they want to do before they’re too old. They know that they need passive income streams to be able to break away from their jobs or retire early. That is why their approach to investing is different than the Level 1 investor.
Instead of hitting the next big thing, these investors are focused on passive income and growth. That’s because unless they have passive streams of income that could replace their work income, they will always need to work to meet their financial obligations.
Level 3 Investors
These ultra-wealthy investors have achieved what the Level 1 and Level 2 Investors are pursuing – financial independence. These investors don’t work if they don’t have to and set their own agendas. This doesn’t mean they rest on their laurels, however. Because they already have the passive income and wealth to maintain their lifestyles, their goals are less about growth and more about capital preservation – maintaining or expanding their wealth – and keeping more of what they make through tax benefits.
The ultra-wealthy Level 3 Investors are focused on capital preservation because if you can’t protect your wealth, the financial independence you’ve achieved could vanish. That’s why these investors don’t get complacent, and that’s why they lean on tried and true investments instead of taking big swings in hopes of hitting the next home run. These investors prefer private alternative investments that offer the opportunity to achieve above-market returns at reduced risk.
Private investments like private equity and private real estate are ideal for capital preservation because they offer above-market returns at reduced risk and are tangible. Unlike stocks, hard assets’ value doesn’t disappear overnight, making it difficult to lose your entire investment.
Non-correlated to Wall Street, these private alternatives are also illiquid – meaning they have long lock-up periods and are restricted from transfer or sale for several years. This illiquidity insulates these assets from the herd mentality and wild market swings. So, even as the stock market falters, these assets hold steady because investors are prevented from liquidating their positions and running for the exits.
For preserving capital, nothing beats tax benefits. To the ultra-wealthy, saving a dollar in taxes is equally valuable as gaining a dollar in new income.
Investing in tax-friendly assets that preserve more of what you make is ideal for wealth expansion and preservation. Because private investments are typically structured as partnerships, and many involve hard assets, the potential tax benefits can be significant and vital to preserving capital.
Private investments in tangible assets structured as partnerships offer significant tax benefits, including deductions, exemptions, depreciation, long-term capital gains treatment, passthrough deductions, and avoidance of self-employment taxes.
Level 1 and Level 2 Investors who finally reach Level 3 status can learn from the Level 3 Investors who aggressively invest in preserving capital by sticking to reliable assets and leaning on the tax benefits afforded certain classes of assets like private real estate and private equity structured as partnerships.