How do millionaires invest their money?

Many, and perhaps most, millionaires are frugal. If they spent their money, they would not have any to increase wealth. They spend on necessities and some luxuries, but they save and expect their entire families to do the same. Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. And they tend to establish an emergency account even before making investments. Millionaires also bank differently than the rest of us. Any bank accounts they have are handled by a private banker who probably also manages their wealth. There is no standing in line at the teller's window.

Studies indicate that millionaires may have, on average, as much as 25% of their money in cash. This is to offset any market downturns and to have cash available as insurance for their portfolios. Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills.

Some millionaires keep their cash in Treasury bills. They keep rolling them over to reinvest them, and liquidate them when they need the cash. Treasury bills are short-term notes issued by the U.S government to raise money and can usually get purchased at a discount. When you sell them, the difference between the face value and selling price is your profit. Warren Buffett, CEO of Berkshire Hathaway, has a portfolio full of money market accounts and Treasury bills.

Millionaires also have zero-balance accounts with private banks. They leave their money in cash and cash equivalents and they write checks on their zero-balance account. At the end of the business day, the private bank, as custodian of their various accounts, sells off enough liquid assets to settle up for that day. Millionaires don't worry about FDIC insurance. Their money is held in their name and not the name of the custodial private bank.

Other millionaires have safe deposit boxes full of cash denominated in many different currencies. These safe deposit boxes are located all over the world and each currency is typically held in a country where transactions are conducted using that currency.

Real estate investments are another common way for millionaires to invest their wealth. Typically, many make their first real estate investment in a primary home and then buy additional residences, usually for tenants. After buying some personal real estate, others also start buying commercial real estate like office buildings, hotels, stadiums, bridges and more.

Millionaires often have large real estate portfolios. Once they have established themselves as a buyer in the real estate market, real estate agents start bringing them deals and they can find it easy to obtain financing. Large investors have many millions tied up in real estate. Real estate may not be an immediate investment to depend on for cash, but it can be lucrative in the long run, and a tried and true investment for millionaires seeking passive income.

Some millionaires are all about simplicity. They invest in index funds and dividend-paying stocks. They seek passive income from equity securities just like they do from the passive rental income that real estate provides. These millionaires simply don't want to spend their time managing investments.

Ultra-rich investors may also hold a controlling interest in one or more major companies. But, many millionaires hold a portfolio of only a few equity securities. For these ultra-rich investors, index funds are common hands-off investments that put money into a specific list of securities and can earn decent returns with minimal time management, low fees and excellent diversification.

Other millionaires also seek dividend-paying stocks that can generate passive income. And, of course, they are also interested in capital appreciation but, for some, that's less of a concern than generating current income.

If your focus is to generate passive income through dividend or real estate investments, many high-net-worth clients work with financial advisors to create a financial plan that includes sources of passive income. Additionally, some advisors specialize in wealth management, which typically combines investment management and financial planning services under one umbrella, and can walk clients through the benefits and risks of different passive income investments for their portfolios.

Unless you are a multimillionaire, you may not participate in a hedge fund or buy into a private equity fund. Public equity is well-known since its shares trade on stock exchanges. One of its advantages is its liquidity. You can readily liquidate your public equity or shares of stock. Private equity funds, on the other hand, generally get their investments from large organizations like universities or pension funds. Investors of private equity funds have to be accredited investors with a certain net worth, usually at least $1 million.

Accredited investors can be individuals as well as organizations, but they are defined by regulations. In other areas, private equity funds do not have to conform to as many regulations as public equity does. Some of the ultra-rich, if they are accredited investors, do invest in private equity.

Hedge funds are not the same as private equity. Hedge funds use pooled funds and pursue several strategies to earn outsized returns for their investors. Hedge funds invest in whatever fund managers think will earn the highest short-term profits possible.

Commodities, like gold, silver, mineral rights or cattle, to name a few, are also stores of value for millionaires. But they require storage and have a level of complexity that many millionaires simply don't want to deal with.

Alternative Investments

Some millionaires, along with the ultra-rich, keep a portion of their money in other alternative investments, which include tangible assets like fine art, expensive musical instruments or rare books. Millionaires and the ultra-rich also have investments in intellectual property rights for songs or movies, which can be very lucrative investments.

Bottom Line

Millionaires have many different investment philosophies. These can include investing in real estate, stock, commodities and hedge funds, among other types of financial investments. Generally, many seek to mitigate risk and therefore prefer diversified investment portfolios. More than one of these types of investments can be combined in comprehensive strategies with the aim to build wealth.

This story was produced by SmartAsset and reviewed and distributed by Stacker Media.