You and I are advised to put our money into simple portfolios and to invest in shares for the long-term for our retirement.

But once the preservation of wealth becomes more important than growing it, other strategies come into play.

The preservation of wealth for the super-rich usually entails:

• Wide diversification at the expense of higher returns
• Reduced volatility
• A focus on real assets such as property and gold
• Investment in illiquid and unlisted securities and companies
• Paranoia over taxes

In fact, I doubt there’s a rich person in the world getting by with an index tracker, a savings account, and a wodge of Government bonds.

Risky businessmen

Firstly, let’s define the sort of millionaires we’re talking about.

I’m thinking riches well beyond the standard Millionaire Next Door variety. Rather, I’m discussing the sort of people who populate the lower reaches of the Sunday Times Rich List.

Let’s say a net worth greater than £10 million/ $15 million.

Now, not all these very rich people practice the preservation of wealth through diversification.

Many self-made entrepreneurs retain a huge slug of the businesses they founded, for example. This makes their net worth very dependent on the day-to-day value of those businesses.

Take Bill Gates. The world’s sometime richest man has diversified into everything from biotech firms to Warren Buffett’s Berkshire Hathaway to Corbis, his digital picture library. Yet despite selling millions of Microsoft shares every quarter, he is still the company’s biggest single shareholder. His 8% holding is worth $17 billion. If Microsoft goes bust, Gates will plunge down the rich list.

The insanely rich like Gates, Warren Buffett and Carlos Slim – the Mexican tycoon who’s currently the world’s richest man – can afford to take their chances. While in percentage terms the wealth tied up in their businesses is huge, the lesser share of money held outside is still enough to ensure a very prosperous lifestyle, whatever happens to their core company.

Such entrepreneurs got rich by being risk-takers. It’s not surprising they are comfortable continuing to take risks afterward.

But it’s also worth noting that lots of very rich people are simply badly advised or ignorant about money, especially the recently rich.

Many famous sports professionals go from millionaire status to bankruptcy in just a few years. They typically manage this by putting their cash into do-or-die business ventures they’ve no ability to evaluate, as well as by leaking money to friends, family, and advisers as quickly in retirement as when they were still earning millions.

Avoid their example if you want to stay rich!

How an old money dynasty stays wealthy

What we’re really interested in are the moneyed upper classes who remain rich from year-to-year and across the generations.

A great insight into their investing comes via the reports of RIT Capital Partners – the Rothschild family’s investment trust.

Listed on the London stock market, anyone can buy shares in the Rothschild’s trust. As a result it’s obligated to report on its activities, like any other company.

And what is very clear if you read its annual reports is that Lord Rothschild does not believe a stock market tracker, some gilts and a wodge of cash is sufficient to guarantee his heirs a chunk of the Rothschild fortune. Far from it!

Here’s how RIT Capital Partners’ assets were allocated as of March 2010:

Now that’s what I call diversification! The unquoted investments alone include all sorts of weird and wonderful stuff, from Brazilian farmland to a newly established Norwegian oil explorer to a 50% stake in The Economist.

Another notable aspect to Rothschild’s strategy is currency diversification:

As you can see, the trust shifts its exposure to different currencies a great deal from year to year. This isn’t so much about trying to make money from currency swings as it is about the preservation of wealth.

Diversification is everything

As Rothschild’s trust demonstrates, the key to wealth preservation is massive diversification, to guard against all conceivable forms of investment failure:

• Massive vertical diversification – Investments across the waterfront of asset classes, from property, bonds, private equity and stocks to more exotic fare like unlisted businesses, land, art, antique furniture and intellectual property such as publishing rights.

• Massive horizontal diversification – Holdings in the different asset classes are spread widely among baskets of stocks, different fund managers, various countries’ bonds, and indeed into different currencies.

• Political and legal diversification – Super-rich people are much more interested in taxes, the legality of their holdings, and political risk than you and me. They may have good reason to be more paranoid in many cases. For this reason they tend to hold some of their assets offshore, including real assets like property or gold.

Coming soon – practical tips from the super rich on the preservation of wealth. If you want to ensure your heirs can blow their inheritance on strippers and sports cars, subscribe for free to make sure you read it.

(Image by: Hamed)

Most corporate workplaces are instruments of psychological torture, yet it can decades (even if you’re ultra-frugal) to build up an escape fund.

Starting a business instead is risky, while even small passive income streams can take years to establish.

You only live once, so for most people the answer must be to find a better job. But what do we mean by better?

• A decent salary is important, but beyond a certain point a higher salary does not increase happiness.

• Jobs that give you a lot of time management freedom are great – but here we’re trying to define a job that you don’t want to avoid at all costs.

• Many doctors, vets, architects and other professionals have off-the-shelf satisfying careers. Is it too late if we’ve already become office wage-slaves?

What’s it all about, Alfie?

Interestingly, we’re not the only ones asking these questions.

In the wake of the credit crisis, Governments are exploring how the bonus culture in banking led to wanton risk-taking and the abandonment of any sense of fiduciary duty. Obviously they’d rather it didn’t happen again.

Early findings back-up other research into the limits of using money as a reward in the workplace, as summed up in this fantastic video:

There aren’t any easy answers to these questions.

For a start, motivation at work is something you want to harness for yourself and your own plans, not a carrot that helps your employer keep the workforce in line on the cheap. Yet in the bigger scheme of things, selfishness is perhaps part of the problem, too.

I discovered the video via Financial Samurai, who muses that:

Purpose is something that can either be questioned before you start your journey or after. You can be a high school or college student who has no freaking idea what you’re supposed to do in life. Or, you can be a 20 year veteran in the workforce who has built a great resume, as well as financial security, but realize you’re middle-aged now and wonder if there’s more to life since you’ve already conquered insecurity, be it financial or otherwise.

Leaving your job has a big opportunity cost – swapping to a new career or starting a business an even bigger one. Yet do nothing, and you can become a Reginald Perrin for the 21st Century.

I’m happy to tell you all I know about saving and investing – and even making money – but I don’t claim to have got the career and purpose stuff quite right in my own life so far. Have you?

A successful start-up is about the most inspiring place you’re likely to work, in my experience. If you own the growing company, it’s even better:

• A guaranteed corporate nonsense-free workplace.
• Control of your own destiny.
• The slim but real chance to become a millionaire.

Set against those benefits is the opportunity cost of losing your salary, impacting on your savings strategy.

Crash course in entrepreneurship

One interesting start-up is Crashpadder, a London-based web service that hooks up homeowners with spare rooms with those looking for a temporary bed. It’s potentially cheaper – and friendlier – than a budget hotel.

While all start-up business have big risks, Crashpadder is the sort of clever and affordable idea that’s within the reach of most spare room entrepreneurs. I was curious to know more, and Crashpadder’s Josie Anderson kindly obliged.

Monevator: Who is behind Crashpadder?

Josie Anderson:

Crashpadder is:

• Stephen Rapoport, Founder. Background in entrepreneurship having founded two previous businesses.

• Josie Anderson, Communications Guru. I left John Lewis to join CrashPadder back in January having spent a number of years managing content for various big brands. I previously worked with Stephen at a web start-up and we’ve been close friends ever since.

• Daniel Hill, Technical Wizard. Dan taught himself web-design in order to help make ends meet whilst he became a world-renowned classical music conductor, but proved so good that he was soon running his own agency.

What is the business model?

Guests book rooms online, paying in full for the stay. We transfer 90% of this to the host after the stay has taken place. We also earn a £3 booking fee from the guest.

Where did the idea for Crashpadder come from?

Stephen was in Sydney during the Olympics in 2000. He arrived the day after the opening ceremony and couldn’t find a hotel or hostel room for love nor money. When a bed was available, it would cost many times what he could afford.

He ended up crashing with one of my colleagues and contributing a little towards the rent, which worked out well – and the idea was born.

Homestays are commonplace across Asia, and even the UK in the past. We hope that this fun, friendly and affordable way to stay will come back in vogue.

How was the business started?

Working from the British Library’s IP centre in mid-2008, Stephen got a basic website live and a business plan written before taking it to various Venture Capitalists for seed capital, which was secured from a High Net Worth Individual.

Did you all quit work straight away?

Stephen gave up his job immediately. For Crashpadder’s first 12 months he lived on the income he made by offering his house as London’s first Crashpadder property. After a time, additional funding was secured, which enabled him to draw a salary as well as employ Dan and myself [Josie], both of whom had previously worked for Crashpadder on a freelance basis.

How is the business going, and what are your targets?

The business is growing fast, increasing revenues by 100% every four weeks since January 1st 2010. We have growth targets in place that reflect this strong start, but we recognise that this rate of growth is unsustainable in the long-term.

The next big step will be a third (and hopefully final) round of investment.

What have you found hardest about setting up Crashpadder?

As a totally new model and concept, it was hard to establish the business operations in a way that is both efficient and scalable. Another huge challenge is one of marketing and communications – we have a sea change of public opinion to affect before we can be considered a legitimate accommodation choice for some demographics.

I’m pleased to say we seem to be overcoming both of these challenges.

What’s been most enjoyable, from an entrepreneurial perspective?

Walking to work in the morning, knowing that everything that awaits is self-selected. The intellectual and commercial challenges inherent in start-up life have been amplified by the fact that the business model is new.

Do you think the gold rush is over for Internet businesses, or are there still plenty of opportunities?

There are huge opportunities, more now than ever. The Internet as a public-facing consumer medium is still only 15 years old – hardly out of seedling stage. Furthermore it is developing technologically at a tremendous rate, making more and more things possible. The transition to mobile Internet in particular will throw up countless new opportunities.

Any last words of advice for would-be entrepreneurs?

Stop kicking your heels and jump in – you’ll know within a month if it was the right thing to do.

Read my interview with an iPhone app developer for more on DIY start-ups.