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Thursday, 6 September 2012

21 Ways Rich People Think Differently

World's richest woman Gina Rinehart is enduring a media firestorm over an article in which she takes the "jealous" middle class to task for "drinking, or smoking and socializing" rather than working to earn their own fortune.

What if she has a point?

Steve Siebold, author of "How Rich People Think," spent nearly three decades interviewing millionaires around the world to find out what separates them from everyone else.

It had little to do with money itself, he told Business Insider. It was about their mentality.

"[The middle class] tells people to be happy with what they have," he said. "And on the whole, most people are steeped in fear when it comes to money."

Flickr / C. Pajunen1. Average people think MONEY is the root of all evil. Rich people believe POVERTY is the root of all evil.

"The average person has been brainwashed to believe rich people are lucky or dishonest," Siebold writes.

That's why there's a certain shame that comes along with "getting rich" in lower-income communities.

"The world class knows that while having money doesn't guarantee happiness, it does make your life easier and more enjoyable."

2. Average people think selfishness is a vice. Rich people think selfishness is a virtue.

"The rich go out there and try to make themselves happy. They don't try to pretend to save the world," Siebold told Business Insider.

The problem is that middle class people see that as a negative––and it's keeping them poor, he writes.

"If you're not taking care of you, you're not in a position to help anyone else. You can't give what you don't have."

Getty Images3. Average people have a lottery mentality. Rich people have an action mentality.

"While the masses are waiting to pick the right numbers and praying for prosperity, the great ones are solving problems," Siebold writes.

"The hero [middle class people] are waiting for may be God, government, their boss or their spouse. It's the average person's level of thinking that breeds this approach to life and living while the clock keeps ticking away."

4. Average people think the road to riches is paved with formal education. Rich people believe in acquiring specific knowledge.

"Many world-class performers have little formal education, and have amassed their wealth through the acquisition and subsequent sale of specific knowledge," he writes.

"Meanwhile, the masses are convinced that master's degrees and doctorates are the way to wealth, mostly because they are trapped in the linear line of thought that holds them back from higher levels of consciousness...The wealthy aren't interested in the means, only the end."

I Love Lucy screencap5. Average people long for the good old days. Rich people dream of the future.

"Self-made millionaires get rich because they're willing to bet on themselves and project their dreams, goals and ideas into an unknown future," Siebold writes.

"People who believe their best days are behind them rarely get rich, and often struggle with unhappiness and depression."

6. Average people see money through the eyes of emotion. Rich people think about money logically.

"An ordinarily smart, well-educated and otherwise successful person can be instantly transformed into a fear-based, scarcity driven thinker whose greatest financial aspiration is to retire comfortably," he writes.

"The world class sees money for what it is and what it's not, through the eyes of logic. The great ones know money is a critical tool that presents options and opportunities."

7. Average people earn money doing things they don't love. Rich people follow their passion.

"To the average person, it looks like the rich are working all the time," Siebold says. "But one of the smartest strategies of the world class is doing what they love and finding a way to get paid for it."

On the other hand, middle class take jobs they don't enjoy "because they need the money and they've been trained in school and conditioned by society to live in a linear thinking world that equates earning money with physical or mental effort."

8. Average people set low expectations so they're never disappointed. Rich people are up for the challenge.

"Psychologists and other mental health experts often advise people to set low expectations for their life to ensure they are not disappointed," Siebold writes.

"No one would ever strike it rich and live their dreams without huge expectations."

BarackObamadotcom via YouTube9. Average people believe you have to DO something to get rich. Rich people believe you have to BE something to get rich.

"That's why people like Donald Trump go from millionaire to nine billion dollars in debt and come back richer than ever," he writes.

"While the masses are fixated on the doing and the immediate results of their actions, the great ones are learning and growing from every experience, whether it's a success or a failure, knowing their true reward is becoming a human success machine that eventually produces outstanding results."

10. Average people believe you need money to make money. Rich people use other people's money.

Linear thought might tell people to make money in order to earn more, but Siebold says the rich aren't afraid to fund their future from other people's pockets.

"Rich people know not being solvent enough to personally afford something is not relevant. The real question is, 'Is this worth buying, investing in, or pursuing?'" he writes.



11. Average people believe the markets are driven by logic and strategy. Rich people know they're driven by emotion and greed.

Investing successfully in the stock market isn't just about a fancy math formula.

"The rich know that the primary emotions that drive financial markets are fear and greed, and they factor this into all trades and trends they observe," Siebold writes.

"This knowledge of human nature and its overlapping impact on trading give them strategic advantage in building greater wealth through leverage."

12. Average people live beyond their means. Rich people live below theirs.

"Here's how to live below your means and tap into the secret wealthy people have used for centuries: Get rich so you can afford to," he writes. 

"The rich live below their means, not because they're so savvy, but because they make so much money that they can afford to live like royalty while still having a king's ransom socked away for the future."

richkidsofinstagram.tumblr.com13. Average people teach their children how to survive. Rich people teach their kids to get rich.

Rich parents teach their kids from an early age about the world of "haves" and "have-nots," Siebold says. Even he admits many people have argued that he's supporting the idea of elitism.

He disagrees.

"[People] say parents are teaching their kids to look down on the masses because they're poor. This isn't true," he writes. "What they're teaching their kids is to see the world through the eyes of objective reality––the way society really is."

If children understand wealth early on, they'll be more likely to strive for it later in life.

14. Average people let money stress them out. Rich people find peace of mind in wealth.

The reason wealthy people earn more wealth is that they're not afraid to admit that money can solve most problems, Siebold says.

"[The middle class] sees money as a never-ending necessary evil that must be endured as part of life. The world class sees money as the great liberator, and with enough of it, they are able to purchase financial peace of mind."

Kim Bhasin / Business Insider15. Average people would rather be entertained than educated. Rich people would rather be educated than entertained.

While the rich don't put much stock in furthering wealth through formal education, they appreciate the power of learning long after college is over, Siebold says.

"Walk into a wealthy person's home and one of the first things you'll see is an extensive library of books they've used to educate themselves on how to become more successful," he writes.

"The middle class reads novels, tabloids and entertainment magazines."

16. Average people think rich people are snobs. Rich people just want to surround themselves with like-minded people.

The negative money mentality poisoning the middle class is what keeps the rich hanging out with the rich, he says.

"[Rich people] can't afford the messages of doom and gloom," he writes. "This is often misinterpreted by the masses as snobbery.

Labeling the world class as snobs is another way the middle class finds to feel better bout themselves and their chosen path of mediocrity."

Flickr / Wei Tchou17. Average people focus on saving. Rich people focus on earning.

Siebold theorizes that the wealthy focus on what they'll gain by taking risks, rather than how to save what they have.

"The masses are so focused on clipping coupons and living frugally they miss major opportunities," he writes.

"Even in the midst of a cash flow crisis, the rich reject the nickle and dime thinking of the masses. They are the masters of focusing their mental energy where it belongs: on the big money."

18. Average people play it safe with money. Rich people know when to take risks.

"Leverage is the watchword of the rich," Siebold writes.

"Every investor loses money on occasion, but the world class knows no matter what happens, they will aways be able to earn more."

Flickr / Ibrahim Iujaz19. Average people love to be comfortable. Rich people find comfort in uncertainty.

For the most part, it takes guts to take the risks necessary to make it as a millionaire––a challenge most middle class thinkers aren't comfortable living with.

"Physical, psychological, and emotional comfort is the primary goal of the middle class mindset," Siebold writes.

World class thinkers learn early on that becoming a millionaire isn't easy and the need for comfort can be devastating. They learn to be comfortable while operating in a state of ongoing uncertainty."

20. Average people never make the connection between money and health. Rich people know money can save your life.

While the middle class squabbles over the virtues of Obamacare and their company's health plan, the super wealthy are enrolled in a super elite "boutique medical care" association, Siebold says.

"They pay a substantial yearly membership fee that guarantees them 24-hour access to a private physician who only serves a small group of members," he writes.

"Some wealthy neighborhoods have implemented this strategy and even require the physician to live in the neighborhood."

Getty Images21. Average people believe they must choose between a great family and being rich. Rich people know you can have it all.

The idea the wealth must come at the expense of family time is nothing but a "cop-out", Siebold says.

"The masses have been brainwashed to believe it's an either/or equation," he writes. "The rich know you can have anything you want if you approach the challenge with a mindset rooted in love and abundance."

From Steve Siebold, author of "How Rich People Think."

The Worst Retirement Investing Mistake

William Bernstein has a gift not only for grasping the complex but for helping the rest of us get it too.
He spent the first chunk of his career as a neurologist practicing on the coast of Oregon but cut back on his work hours in 1990. A few years later he focused on a new fascination: investing. He launched an online journal (a sort of proto-blog) called efficientfrontier.com and wrote "The Intelligent Asset Allocator," the first of several books. (He has also written for MONEY.)

Now he's an investment adviser for a handful of high-net-worth clients. Bernstein's writing often explores academic financial theory, but he manages to turn it into practical, plain-English advice.
His latest obsession, resulting in the short e-book "The Ages of the Investor," is what economists call the life-cycle theory, which dictates that your asset allocation should be tied to your earnings power throughout your career.

Bernstein, 64, spoke with senior editor George Mannes; their conversation was edited.

There's a debate going on now among economists about how much exposure people should have to stocks. What made you weigh in?

It's almost like a political issue. There's a "right wing" of very smart, authoritative people who think that savers and retirees should be investing conservatively because stocks are so risky. And then there's a "left wing" of equally smart and authoritative people who believe the opposite.

I was trying to reconcile the two views. Plus, I wanted to deal with what happened in the 2008 financial crisis, which changed how people, myself included, think about risk.

How so?

A lot of people had won the game before the crisis happened: They had pretty much saved enough for retirement, and they were continuing to take risk by investing in equities.

Afterward, many of them sold either at or near the bottom and never bought back into it. And those people have irretrievably damaged themselves.

I began to understand this point 10 or 15 years ago, but now I'm convinced: When you've won the game, why keep playing it?

How risky stocks are to a given investor depends upon which part of the life cycle he or she is in. For a younger investor, stocks aren't as risky as they seem. For the middle-aged, they're pretty risky. And for a retired person, they can be nuclear-level toxic.

But at retirement you could be investing for several more decades. Don't you have time to make up for short-term losses?

At the end of your career, you have no more earnings capacity left beyond Social Security or a pension. You have less of what life-cycle theory calls "human capital."

So if you have a long series of bad returns, plus you're withdrawing 4% or 5% of your portfolio to live on it, then in 10 to 12 years, you may not have anything left. Withdrawals during the distribution phase combined with a bad bear market can completely destroy a retirement.

So how should I be investing near and after retirement?

You want to end up with a portfolio that matches your liabilities, meaning the amount you'll need to spend in retirement. The rule of thumb I came up with, based on annuity payouts and spending patterns late in life, is that you should save 20 to 25 times your residual living expenses -- that is, the yearly shortfall you have to make up after Social Security and any pension.

This portfolio should be in safe assets: Treasury Inflation-Protected Securities, annuities, or even short-term bonds.

Anything above that, you can invest in risky assets. That's your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn't do well, at least you're not pushing a shopping cart under an overpass.

What if you are nearing retirement age and you don't have that 20 to 25 years saved?

You should be working until you get that number. If you're 65 and you've only got half of your living expenses saved, you can retire and you may skate through.

You may die early, or you may have a good market. But there's a significant chance you're going to be eating Alpo when you're 85. That's the risk you're taking. The other choice you have is to work a few more years and reduce expenses.

One thing that we point out to our readers is that if you don't have stocks in your portfolio, you expose yourself to inflation risk.

That's true. By owning stocks you do mitigate inflation risk, but of course, you're exposing yourself to equity risk to do it. It's sort of like all these people who are now buying dividend-yielding stocks because Treasury bonds don't have any yield; they're exchanging a riskless asset for a risky asset.

But there's another asset class that people really don't think about when they think about inflation protection, which is short, high-quality bonds with a maturity of less than three years. If we ever do get an inflationary shock, investors will demand a high real short-term rate of return. It's what happened during the late '70s and early '80s.

Even though interest rates are terrible right now, if inflation recurs -- as I think it probably will -- short-term bonds are a fine place to be, as are individual Treasuries or certificates of deposit. Since they mature soon, you can replace them quickly with newer, higher-interest bonds.

Interest rates usually more than keep up with inflation. It's true that real yields right now are historically low, but as a student of financial history I have to believe that's not going to last forever.

Okay, so stocks are risky at retirement. What about when I'm young?

For the average person, you'll want a very high stock allocation. Let's imagine you start working at age 25, and let's say for the sake of argument you have 35 years worth of human capital -- that is, 35 years of salary left in you. That's an asset that you own. What you've saved in one year for retirement is still minuscule compared to that 34 years of earning and saving that you have left.

So even if your investment capital when you're 26 years old falls by one-half, your total worth has fallen by only a couple of percent because you still have that 34 years of human capital left. Your ability to earn and save dwarfs the loss in your portfolio.

And what about when I'm in the middle of my career?

That's the key phase. You need to start bailing out of risky assets as you get closer to achieving that liability-matching portfolio?when you can "win the game" without taking so much risk.

Instead of cutting your stock allocation one percentage point a year -- the standard formula -- in a year with absolutely spectacular returns, you might want to take 4% or 5% off the table. In a series of years when stock returns have been poor, you don't take anything off the table. And over time you start laying down a floor of safe assets with the proceeds from the stocks you've sold.

When exactly am I doing this?

Getting close to hitting your number is usually going to happen during a bull market, so the psychology of doing this right is tricky. It's hard to cut back on risk and accept lower returns when your neighbors are getting rich.

If you're very lucky and very frugal, hitting your number might happen when you're 45. In the worst-case scenario, you do everything right and still come up short at 65, so you wind up working longer or greatly paring back your expectations.

It sounds like retirement success depends on when you were born.

Yeah, that is certainly true. Young people should get down on their knees and pray for a brutal bear market at the beginning of their savings career, because that's going to enable them to buy a large number of shares cheaply. Having a sequence of bad returns first, followed by strong returns, is the best-case scenario.

I did a little thought experiment in which I calculated how many years it took people starting work in different years to make their number. I realized that the cohort that started working during the worst of economic times is the one that did the best.

The last cohort that actually was able to make their number started their careers in 1980, and they made their number in 19 years. And the graph ends in 1980, because no cohort that started work after 1980 actually made the number.

Ouch. Can the average person overcome that using the investing strategy you lay out?

I've flown airplanes, and as a doctor, I've taken care of kids who can't walk. Investing for retirement is probably harder than either of those first two activities, yet we expect people to be able to do it on their own.

An alternative would be to have a pension system such as in Singapore, where the government forces people to put money into a dedicated investment pool that it manages at minimal expense. And when people get to be of retirement age, they are forced to annuitize some of those savings, which turns into safe income.

The political chances for a plan like that in the U.S. seem low.

Yeah, I'm definitely in tune with the times.

What about target-date mutual funds, which gradually take on less risk as you age?

They're better than what 95% of people are going to do, particularly if they're run with low expenses. If you're not capable of doing what I suggest, then a target-date fund is not a bad solution.

What if you want an adviser to help you? How do you find a good one?

Interview one and say, "Look, this is my portfolio now," and you show him or her a simple, cheap index-fund portfolio.

And if he says, "You know, this is really good, you've got the right idea, I think we can diversify you a little more by using some more cheap index funds," that's the answer you want to hear. You've probably found an honest adviser. And someone who adheres to an index-fund portfolio will probably be more likely to adhere to the policy because you've got someone who has some humility and realizes he doesn't know how to time the market.

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