It’s safe to assume the vast majority of you reading Financial Samurai want to be rich. I trust those of you who’ve been reading this site between 2009 and 2012 have indeed become much richer. The compounding forces since then have been enormous.

We are probably one of the richest communities on the internet today based on all the surveys I’ve conducted. For example, 35% of you have a net worth of between $300,000 – $1 million. While 25% of you have a net worth over $1 million. Not bad compared to the median net worth figures.

Despite our good fortune, it’s worth discussing the two levels of rich. Because since I started this site, it’s clear one level of rich has pulled far ahead. And that one level of rich didn’t do so by investing in index funds.

Index Funds And The Rich

I know we all love index funds. They are the personal finance community’s #1 recommendation for where to invest our money in stocks. However, it’s hard to get really rich off index funds alone.

In addition, if you want to achieve financial independence well before the traditional retirement age of 65, investing only in index funds is probably not going to cut it.

The only way to get rich sooner off index funds is to consistently invest large sums of money. But that’s kind of like saying to get richer, start with a lot of money.

The reality is, there’s a whole other level of rich that has little to do with investing in index funds. As one centi-millionaire once told me, “Investing in index funds is what middle-class people do who don’t know what to do.”

My View On Index Funds

I’m a fan of index funds. Over a 10-year period, the vast majority of active fund managers underperform their respective indices due to high fees and poor investing acumen. However, as I look back on what enabled me to leave my job in 2012 and stay unemployed, it wasn’t index funds.

I view investing in index funds as a low-cost, lower-risk way of investing in public equities. Investing in an S&P 500 index fund or ETF is my default setting when I’m buying the dip, but don’t have strong conviction.

I understand the downside of investing in an S&P 500 index fund or ETF. A typical bear market lasts about a year and has about a 35% drawdown. I’m good with that.

Investing in an S&P 500 index fund is like investing in a super-tanker. It doesn’t move very fast – at historically a 10% annual return – but it also doesn’t easily veer off course or sink to the bottom of the ocean either. Sooner or later, the super-tanker will get to its destination.

Index funds have acted like a pleasant tailwind pushing me more towards an ever-moving financial independence number. But they weren’t the difference maker.

The Two Levels Of Rich

1) First Level Rich: The Mass Affluent

The first level of rich is what I consider the mass affluent class. The mass affluent class is highly educated, motivated, and upwardly mobile. The mass affluent class is considered rich by general standards, but often doesn’t feel rich.

Today, the mass affluent class has investable assets of between $500K – $3 million. The mass affluent class also has a net worth of between $500K – $5 million. The range is largely dependent on age, location, and household (single versus couple). HENRYs are part of the mass affluent class.

The mass affluent class loves investing in stock index funds and real estate. They’ve got good jobs, often with six-figure household incomes. Usually less than 20% of their investable assets is invested in alternative investments, including cryptocurrencies.

For the most part, the mass affluent class is a great place to be. You’re comfortable and always have hope for a wealthier future.

Level of net worth needed to join the top 0.1% in selected countries (U.S., Monaco, Switzerland, Singapore) and moreSource:

2) Second Level Rich: The Truly Rich

The second level of rich is what most people think about when they hear the word rich. We’re talking vacation homes in the Hamptons, first-class flights, $100,000+ automobiles, and generous donations to charity where your name appears on a wall.

Let’s call the second level of rich the Truly Rich. The truly rich have investable assets of at least $5 – $10 million and a net worth of at least $10 – $25 million, depending on location, age, and household.

In a bull market, the truly rich crush it with multi-million dollar gains a year. Conversely, in a bear market, the truly rich get beat up the most. Back in 2009, we were all relatively much wealthier not because we made more money, but because people like Warren Buffet lost tens of billions of dollars in individual wealth.

The truly rich have a minority of their investable assets and net worth in index funds. Instead, the truly rich have the majority of their net worth in their business and other business ventures.

In terms of wealth creation, the top 0.1% and 0.01% have trounced those in the top 1%, never mind the 99%. For those folks with incomes and net worths between my two definitions, you are free to call yourself whatever you want.

The top 1% by wealth in America versus Top 0.01%Source:

Net Worth Breakdown By Levels Of Wealth

Here’s a good net worth breakdown visualization by net worth levels. The data is from the Federal Reserve Board Of Consumer Finances, which comes out every three years.

Let’s assume the mass affluent represented in the chart below is at the $1 million net worth level. Roughly 25% of the mass affluent’s net worth is in their primary residence, 15% is in retirement accounts, 10% is in real estate investments, and 12% is in business interests.

In comparison, for the truly rich ($10M+), at least 30% of their net worth is in business interests. Intuitively, we know that entrepreneurs dominate the wealthiest people in the world. Therefore, if you want to be truly rich, take more entrepreneurial risks.

Index Funds Are Mostly For The Mass Affluent

I actually don’t know a single person who is worth over $10 million who has a majority of their investment assets, let alone net worth, in index funds. Conversely, I know plenty of people with net worths below $5 million who either only invest in index funds or only have a combination of index funds and real estate.

Here is the rough net worth breakdown of three truly rich people I know. Perhaps you can share your own insights too in the comments below.

Truly Rich Net Worth Composition #1: Net worth of about $30 million. 35% is his ownership stake in his online business. 30% is in investment real estate. 20% is in public equities (60% index funds, 40% individual names). 10% is in various private funds. 5% is in municipal bonds and other low-risk investments.

Truly Rich Net Worth Composition #2: Net worth of about $100 million. 40% is his ownership stake in his private equity firm as a partner. 10% is in various private companies. 15% is in public stocks (50% index funds). 30% is in real estate. 5% is in various risk-free investments.

Truly Rich Net Worth Composition #3: Net worth of about $250 million. 30% is invested in private funds spread across venture capital, venture debt, private equity, and private real estate. 40% is his ownership stake in his private money management firm. 20% in physical real estate, including two vacation properties. 10% is in municipal bonds and other stable investments.

Then I know one fella who was roughly worth “only” $100 million 10 years ago and now he’s worth over $5 billion through savvy investments. He’s an excellent tennis player too!

None of these examples involve investing in index funds to get rich. They all got truly rich by building a business while owning lots of equity.

Getting Rich Is About Time And Risk Tradeoff

If I could rewind time, I would have taken a lot more risk.

Blowing yourself up in your 20s and early 30s is not that big of a deal. You can always earn back your losses. But once you’re in your 40s or later, unless you’ve already amassed a decent fortune, it’s harder to take more risks to get rich. If you have children and parents to take care of, you will be forced to be more risk-averse.

When I was 23, I had a lucky win in 2000 when I invested $3,000 in VCSY, a Chinese internet company. It grew by 50X to $150,000. Oh man how I wish I had invested more. I look back now and can’t believe how little I had invested.

On the other hand, if I had invested $3,000 in an S&P 500 index fund back in early 2000, it would be worth about $9,200 today. Not bad, but not nearly the $150,000 that I would go on to reinvest in San Francisco property in 2003.

Although it felt risky buying property at age 26 with a $465,000 mortgage, I should have leveraged up even more! At the time, I was looking for a much nicer property that was 80% more expensive. But I was too scared to take on so much debt despite a growing career.

As you grow older and wealthier, you’ll probably wish you had taken more risks too.

What is the minimum net worth amount to be considered rich?

$20,000,000 or more
I refuse to put a number on the word “rich”. Wealth is but a state of mind.

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Index Funds Are Great For Those On The Traditional Path To Retirement

If you want to retire closer to the traditional retirement age of 60-65, then index funds are great. A 10% average annual return is what it is. It takes 7.2 years to double your money at that return percentage.

Being happy, plump, and free in your 60s is not bad! Although, future returns may be much lower, thereby delaying retirement.

If you want to achieve financial freedom sooner, then you’re going to have to take more risks beyond index funds. As you move out on the risk curve, you will gradually start to feel like investing in index funds is one of the lower-risk investments you can make.

In addition to investing in index funds, you may want to take more risk by:

Starting your own businessInvesting in real estate beyond your primary residenceConcentrating your positionsInvesting in other private businesses or angel fundsInvesting in more speculative assets like small caps and cryptocurrenciesSacrificing more family time so you can reach the top of the corporate ladder

Satisfaction Will Prevent You From Getting Richer

In terms of trying to get rich, I have this “problem” I’ve faced all my life. I don’t have a top gear to grind for maximum wealth potential for a very long time. Instead, I’m more easily satisfied.

When I was in high school, I didn’t train harder in tennis because I was satisfied with just winning at the high school level. The thrill was good enough! Winning junior tournaments or playing college tennis didn’t interest me. Therefore, I never lived up to my potential until I started playing league tennis again in my 30s.

At work, I wanted to make Managing Director. But after just one year of not getting promoted to MD at age 33, I decided to move on. Normal people would keep trying for three to five years to get promoted, since 33 was on the young side. But I didn’t care anymore. I just needed to try once to minimize regret.

I left banking along with millions of dollars in foregone compensation at age 34. Why? Because I was satisfied living on $80,000 a year in passive income in exchange for more freedom.

With Financial Samurai, I know I could grow this site larger by hiring a lot of freelance writers. I can add on lots of features, create expensive e-courses, and more to make lots more money. But what’s the point? To go back to feeling like I have a job? Forget it! All income generated online already feels like a bonus.

If I want to get richer, I’m not going to allocate most of my capital to index funds. Instead, I’m buying single stocks, investing in real estate with leverage, investing in private equity, or building my own business equity.

If You Want To Get Really Rich

Here’s the lesson. If you want to get really rich, prevent yourself from becoming easily satisfied. Tell yourself what you have is not enough or is not good enough. Constantly compare yourself to others so you can get motivated to try harder!

By constantly seeking more, you will work harder and take more calculated risks. As a result, you should get richer in the process.

Conversely, if you want to stay mass affluent or middle-class, appreciate more of what you have. Compare down, not up. Better yet, try not to compare at all.

The Buddha taught us “desire is the cause of all suffering.” Therefore, try to minimize your desire for more. This includes homes, cars, vacations, promotions, titles, and even children. Trend towards being a nobody.

The Rich Threshold For Happiness

Just know that once you make over $200,000 – $250,000 as an individual or $300,000 – $350,000 as a couple, you won’t be happier. Also know that once you get past between $3-$5 million in net worth, you likely won’t be happier either.

Therefore, once you get to these financial levels, I highly recommend you pursue something you really enjoy doing regardless of the money. If you can then grow your income and wealth while doing what you love, you will have hit the richest jackpot of all!

And if you really don’t care about achieving these financial thresholds, you can always feel rich without having a lot of money. Find richness in time, relationships, and health.

Related posts:

The First Million Might Be The Easiest

How To Feel Rich Even If You Can’t Get Rich

Readers, do you see the difference between the two levels of rich widening? Are you satisfied with being a part of the mass affluent? Or would you like to become truly rich?

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