The wealthy know that investing is a decision-making process...one that minimized risk. It is how an investor uses the process that creates risk.
In Control = Safe
Out of Control = Risky
As you know, being aggressive or conservative is really a measure of risk aversion. And risk aversion is dictated by your risk tolerance. (Take a risk tolerance quiz)
This distinction is why the wealthy have a different way of looking at things. Instead of risk, "investor type" describes the level of control.
The SEC defines the criteria for an Accredited Investor as:
When you qualify as an accredited investor, you can buy and sell investments that most individual investors cannot.
All it takes is income and net worth (not PROFIT!). There are no other qualifications or requirements.
Win enough money in the lottery, and you can be an accredited investor.
There are many highly paid "employees" who qualify as accredited investors just based on their income (such as professional athletes).
The problem is that having money does not that accredited investors know HOW to invest (again, such as professional athletes). You still need financial education to be successful and make money.
Think about it; meeting the criteria of an accredited investor is the indirect goal of every long-term investor saving for retirement.
So if you choose not to invest time expanding your financial education, you must turn your money over to competent financial advisors who can guide your decision making process.
This class of investor shares several traits, such as self control, control of their personal finances, and control of their trading and investments. The gain this control through education.
More than likely, this is the investor type you'll be shooting for, as there are no "income" requirements. Anyone can be qualified.
In fact, this site was created to help you become a Qualified Investor.
This category of investor type has all the characteristics of a qualified investor, as well as control of taxes, fees and commissions, and timing of investments. These additional characteristics come about from the experience of applied education.
Combining the knowledge of these different realms allows the sophisticated investor to maximize returns while minimizing risk.
A sophisticated investor also realizes that he or she may not be an expert in these different areas, and seeks out a team that can provide guidance.
In addition, sophisticated investors have excess cash that can be used to go after superior profits. This excess cash comes from consistent returns (Better Investing Steps 2 and 3).
If you want to become wealthy but are not interested in starting a business, your goal should be to become a sophisticated investor.
Their business could be something small like a website, or a multi-national company; both require the knowledge of how to create and build assets.
The Inside Investor adds managerial and legal control, along with access to information, to the characteristics of qualified and sophisticated investors.
The good news is that it does not take much to start down the path of an inside investor. All you need is a good idea and smart, supportive people by your side. Start small and give it a shot...getting started is often the hardest part.
An inside investor can also learn the skills needed to analyze companies from the "outside". Therefore, a successful inside investor can learn to become a successful sophisticated investor.
Recent examples include Mark Zuckerberg (Facebook) and Mark Pincus (Zynga). Other notable examples include entrepreneurs of the past like Bill Gates and Henry Ford.
You won't get wealthy if you don't work hard. But not everyone that works hard is rich...there are no guarantees. Hard work is more like the price of admission. Let's do a little math and figure out just how hard it is to become the first investor type: Accredited.
At last count, surveys estimated the number of accredited investors was between 5 and 7 million American adults. Lets be generous and use the high end of that range (7 million).
In the United States, there are approximately 300 million people. But not all of them can invest, so this is not a good number for us to use.
According to the US Census Bureau, 75.7% are over the age of 18. So we've got approximately 227,100,000 adults in the United States. Of course, the younger you are, the lower the probability of being accredited, so we can safely assume that ~220,000,000 adults could be accredited.
Using these very rough estimates, about 3.2% of American workers could qualify as accredited investors.
And that means there are even fewer of the other investor types listed on this page.
What? Still not fair you say? What about people who are unemployed? Surely this will make a difference.
True...from 2010-2013, we were running between 7% and 15% unemployment depending on what statistics you reference. But that also means 90% employment...and I'm sure there were a few accredited investors who lost their jobs between 2008 and 2009.
But OK, you win. If we apply the unemployment percentages to our estimate of working adults (220 million), we're left with 198 million employed American workers that could qualify as accredited investors.
Using this second set of very rough estimates, about 3.5% of American workers could qualify as accredited investors.
It's doubtful that all of the 7 million accredited investors are "employed", which means that the 3.5% number is on the high side.
This tells me that expecting to build wealth or get "rich" by working for an employer is not realistic (or at least has a VERY low success rate). In other words, it isn't a good plan.
As we've just seen, most people who say they "plan" to be wealthy really don't. Instead they have a "goal" to be wealthy, but a plan that involves working at a company, getting raises, and then retiring. And a goal without a good plan is just a dream.
So if that sounds like you, ask yourself:
Investing is a marathon, not a sprint. If your goal was to win a marathon, you wouldn't sign-up the day of and just start running around. Yet that is exactly what a lot of people do when they set out after their financial goals. No plan, no preparation...just money in the market.
If you want to win a marathon, you start training months ahead of time. Your training includes measuring how much time it took you to run different distances, measuring your progress, trying out different strategies for conserving your energy, eating well, strength training, studying the tactics of people who have won marathon's in the past, etc.
Successful investing requires just as much, if not more, preparation. Figured out how many pay raises you would need to become an accredited investor. Figure out how much extra time you would have to spend working (overtime, holidays, extra shifts, second or third job, etc.)? Study successful investors and figure out how they did it.
My point isn't meant to be depressing...it's meant to get you thinking about your plan.
Remember what Jim Rohn once said:
"If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much."