UHNW Blueprint Society

The ultra-wealthy, particularly the top 0.1%, have a significant advantage when it comes to compounding their wealth over time compared to the rest of the population. This is largely due to their ability to generate high returns from illiquid investments in privately held businesses, while avoiding major disruptions to the compounding process.

One key factor is that the top 0.1% tend to be less risk-averse than the average investor. They are willing to concentrate large portions of their wealth in high-growth potential private companies. While these investments are highly illiquid, they offer the prospect of outsized returns if the companies are successful. The average investor, in contrast, tends to be more risk-averse and focuses on liquid, publicly-traded securities. This typically results in a lower overall rate of return which hampers compounding.

The ultra-wealthy are also better able to allow their investments to compound uninterrupted over long periods of time. For most people, major life purchases such as buying a home or paying for education disrupt the compounding process, as significant assets are pulled out of the portfolio. The top 0.1% have sufficient wealth to cover these large expenses without materially impacting their core investment portfolio, allowing them to keep more money compounding over time.

Finally, the top 0.1% tend to be more exposed to investments such as real estate and businesses that are leveraged to some degree with debt financing. In an inflationary environment, this leverage can work to their advantage, as debt becomes easier to pay back while asset prices rise. Those who are debt averse and whose portfolio is primarily equities and bonds, in contrast, don’t get this inflation hedge effect.

Ultimately, the ability to compound wealth at high rates over long, uninterrupted periods of time is a key driver of the continued concentration of wealth. While this article focuses on some factors that contribute to the compounding advantage of the ultra-wealthy, it’s important to note that these are average tendencies and there is significant individual variation. Additionally, building wealth over the long run requires balancing risk and return in a way that is appropriate for each investor’s unique circumstances and goals.