Rich people have enough assets to diversify their portfolio. What this means is that 1. if one sector does poorly, they have other sectors to balance out the losses and gain overall, and 2. they have a diversified risk profile so they have security in some assets, and some chance in striking extreme wealth. They have the financial security to invest for the long term and be unaffected by short term fluctuations.
Poor people barely have enough assets to survive. If they do have assets to invest, they don’t have enough to diversify, so they take on greater risk and fluctuation, and given their precarious financial situation, are more likely to need to cash out in the short term, therefore suffering from even more risk.
Perception of Money – Rich vs. Poor - In general, the poor don’t spend money, so they never learn how to spend wisely.
Perception of Investing
Rich people see investing as a skill and an honorable profession because it plays an important role in job creation, value creation, economics and business. It is also risky and punishing, so therefore, they earned and deserve whatever ROI they see.
Poor people see investing as a source of wealth inequality: it’s a game that only the rich people can play, a system that keeps the rich people rich and the poor people poor. When a poor person receives an investment, that poor person knows full well that they are loosing a % of their hard work and profits for no other reason than that they are too poor to fund it themselves. If they were born with more access to capital, they could not only fund the idea themselves and keep more of the profit, but hire other [poorer] people to do the work for them. Investing, again, to a poor person, is injustice and wealth inequality.
Perception of Investors (from Life Lessons April 2014)
I used to avoid investors for several reasons. 1. I felt it was a perpetuation of wealth inequality: because I was born poorer, I am unable to invest in myself and I have to give up profits to people who are richer even though I’m doing all the work; 2. I got this far without help, I want to finish without help and prove myself that way. This second point contributes to the first point where I feel like I’m doing all the work because I try to do all the work to avoid paying more for more help. I see help as another perpetuation of wealth inequality where if I was born wealthier, I could have paid for the help and not had to give up equity. NOW I think about it differently: 1. It’s about buying time and opportunity with equity. Time: I can work another 2 years and save up money so that I can start a company with my own money, but I will have paid 2 years of my life: is it worth the equity I’ll be saving? Opportunity: Will the opportunity and circumstances necessary to succeed still be there in two years? 2. If you can afford to pay for an expert to accelerate your success, why not? In the past I never did because I could never afford it, but now that I can, I have moved from the poverty to the middle class, and why hold myself to the disadvantages of poverty when I should be maximizing my advantages as they come? Going alone is good if you have no other choice, but when a better option presents itself, don’t be stubborn in your ways: adapt to the situation and capitalize on your opportunities. Take help if it helps, don’t if it doesn’t. This falls into the theme of how the poor only learn how to save money, never how to spend, so they don’t use their money wisely. It is important to realize that what were previously luxury items are now affordable and strategic investments.
Read more about articles in the Rich vs. Poor Series here.