This article is an excerpt from the Shortform book guide to "The Millionaire Next Door" by Thomas J. Stanley and William D. Danko. Shortform has the world's best summaries and analyses of books you should be reading.
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Why is investing for the future important? How do millionaires go about investing for the future?
Investing for the future is important because the wealth you build through your investments will provide financial security and additional income. Millionaires invest for the future by putting their savings in investment vehicles like stocks and allowing them to grow.
Read on to learn more about how millionaires are investing for the future.
How Millionaires Invest for the Future
Smart planning is essential to investing for the future and accumulating wealth. Wealthy people spend a significant amount of time—8.4 hours a month or 1.2% of their time—planning their financial future. They do regular planning each month and prioritize managing their financial assets over other activities.
High-income under-accumulators—many busy doctors are a prime example—feel they don’t have adequate time to plan their financial future. Compared to millionaires, they spend half as much time—4.6 hours a month—on financial planning.
Of course, simply increasing the amount of time you spend making plans on investing for the future doesn’t automatically translate into building wealth. You need to focus on the right kind of investments, educate yourself, get quality financial advice, and follow that advice.
Prodigious accumulators and under-accumulators have different ideas on investments. One reason under-accumulators spend less time on financial planning is that they consider assets that are easily convertible to cash to be investments—for instance, saving accounts, money market funds, and short-term Treasury bills. In fact, under-accumulators are two times more likely than prodigious accumulators to keep at least 20% of their wealth in cash or near-cash, which they can easily access and spend. These types of assets take less time to plan than those pursued by millionaires. High-income under-accumulators also have more of their wealth tied up in vehicles and other assets that depreciate.
Millionaires when investing for the future are more likely to invest in assets that appreciate in value without producing taxable income, such as 401(k)s and IRAs. Also, they have more of their wealth invested in businesses, real estate, stocks, and other tax-deferred assets.
Millionaires Invest in Stocks
Fully 95% of millionaires own stocks. Most keep 20% or more of their wealth in publicly traded stocks.
However, very few millionaires—less than one in 10—are active traders. Most don’t closely track the daily ups and downs of the markets or trade stocks in response to current events—32% keep their investments for more than six years; only 9% hold them for less than a year.
It’s expensive and time-consuming to trade constantly. Active traders or brokers often spend more time trading than thinking about and investing for the future. They don’t accumulate much wealth because they don’t give investments enough time to grow. Further, any short-term gains are taxed.
In contrast, millionaires spend more time managing a small number of stocks. They’re focused investors, often investing in industries they’re knowledgeable about. Millionaires prefer to deal with brokers who study the markets and don’t act precipitously.
Millionaires Hire Financial Advisors
To more efficiently plan their investments, many millionaires consult competent financial advisors. But before hiring anyone, they do their homework.
They research and interview potential advisors and seek referrals from other professionals they trust—for instance, their accountants and attorneys, as well as other business associates. They request references, a credit check, and documents showing training and experience.
Cold-callers who target high-income people aren’t good prospects and are unlikely to help anyone accumulate wealth. One wealthy man who was interviewed for this book got rid of cold-callers by asking for their personal income and wealth appreciation data so he could evaluate them. None ever called back.
In contrast, under-accumulators who invest in stock often do so on the advice of multiple advisors, including cold-callers touting a stock of the week. They often get poor advice because they don’t take the time to find quality financial advisors.
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