At the height of the Financial Crisis in 2008, the number of millionaires in the United States shrunk by 2.5 million households.
The number of American households with a net worth of $1 million or more, excluding the value of their primary residence, fell 27% to 6.7 million in 2008 from an all-time high of 9.2 million the year before. That massive loss of millionaires was almost entirely due to the stock market crash since the net worth calculation excluded the value of a primary residence.
These “Equity Millionaires” who lost their millionaire status in 2008 saw the values of their stock portfolios, mutual funds, managed accounts, 401Ks, and IRAs plummet almost overnight.
If they had rode out the storm, most of these Equity Millionaires would have seen their wealth fully restored by April, 2012, but the reality is most of them never recovered their wealth.
That’s because, like many Americans at the time, many lost their jobs or had their incomes reduced. And with their savings depleted, these Equity Millionaires had no choice but to liquidate their stock holdings to make ends meet. And with their equity holdings liquidated, they were never going to recover their losses.
Fast forward to today and the economic turmoil brought on by COVID-19 with the economy ground to a halt due to quarantine and stay-at-home safety measures, many are without work and suffering financially.
As during the Financial Crisis, many Equity Millionaires have also been lost during this panic as many have liquidated their stock positions to have cash on hand to survive the financial crisis.
While Equity Millionaires suffer during recessions and dramatic downturns like the current crisis, another class of millionaires are patiently riding out the storm.
These millionaires have an additional passive stream of income independent of their day jobs and independent of the Stock Market.
Many may be out of work like many other Americans but the asset classes they’re invested in are shielded from recessions. Instead of volatile public equities, these sophisticated investors prefer income-producing real assets that provide cash flow and appreciation – all backed by a tangible asset – even during a recession.
So while Equity Millionaires have their fortunes tied to volatile public equities, “Income Millionaires” have their fortunes tied to income-producing tangible assets – typically of the type considered essential to our everyday lives, including housing, work, food, and energy. Because of their inherent nature, these assets are recession-resistant.
To remove public volatility from their investment picture, Income Millionaires prefer to invest in income-producing tangible assets passively through private investment funds not only for the freedom from day-to-day management responsibilities but also for the long-term investment windows these private investments offer.
While Equity Millionaires place a premium on liquidity, Income Millionaires place a premium on illiquidity.
Long lockup periods mitigate the risks of panic-induced selloffs common in the public markets. These long-term windows not only allow investment assets to incubate and mature to maximize longevity and returns to their investors but also protect investors from themselves.
Illiquidity acts as a fail-safe mechanism for private investments.
By investing in assets with lockup periods of 5-12 years, Income Millionaires eliminate any possibility of ever making a decision clouded by anxiety because with a long-term window; they are legally prevented from selling off their interests – as are their co-investors.
With everyone locked in for the long haul, no one investor will ever be able to induce panic and trigger a selling frenzy and plummeting all of their fortunes.
For all these reasons, Income Millionaires have little to worry about when the economy hits the skids. Income tied to essential assets like housing, work, agriculture, energy, etc. will continue to cash flow and continue to appreciate even in a downturn.
Unlike Equity Millionaires, who can lose their entire investments in the stock market, Income Millionaires know they’ll never lose their entire investment capital because their investments are backed by tangible assets with intrinsic value like buildings, land, farmland and mineral rights.
Income Millionaires have been investing in income-producing tangible assets for years to avoid panic-induced volatility of the type seen recently from COVID-19 panic.
Having a passive income stream frees these Income Millionaires from having to liquidate their investment positions in order to make ends meet.
In other words, by avoiding the public markets and investing in long-term private investments, income Millionaires ensure survival during recessions, unlike their Equity Millionaire counterparts who suffer the most during economic downturns.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.