Congratulations, You're Rich - Here's How to Stay That Way

I had a conversation recently with an acquaintance who's a couple of decades older than I am.

Once we were done moaning about the Orioles and when we were finished incorrectly forecasting the upcoming college football season, the discussion turned to the markets.

This gentleman has done very well for himself in his lifetime. Financially, he's pretty much set, and his kids are going to be in good shape as well.

That's why I was shocked when he started asking me about Facebook Inc. (Nasdaq: FB), Inc. (Nasdaq: AMZN), Netflix Inc. (Nasdaq: NFLX), and other market darlings.

He's already rich, but he's risking big chunks of his capital on high-multiple stocks that pay no dividends.

What's worse, they can - and often do - decline rapidly if they disappoint the Lords of Wall Street. Just look at Facebook.

I had to get to the bottom of this...

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You Won't Believe the Way Some Rich Folks Invest

So I asked, bluntly as ever, why the hell he was doing that.

When I pressed, he said he watched CNBC every day and got his ideas listening to the interviews.

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When further pressed, he admitted that he and his wealthy friends spent a lot of time drinking coffee (until midday anyway, then the beverage choice tends to change a wee bit), playing cards while watching CNBC, and talking about stocks.

These fellas all own the same stocks... and they're all committing the cardinal sins of a) relying on tips, and b) over-trading.

He asked what I thought he should do. I asked him to give me a day or two to think about it.

And this is what I came up with.

The simple truth: My friend is trading stocks with his coffee buddies every day because of its intellectual stimulation.

The alternative would be to go to the racetrack. Personally, that'd be my choice, but if you are already wealthy and want to play around in the stock market to feel like you are "in the game," connected to the world around you, then take about 5% of your money and mess around to your heart's content.

If the market pulls a "2008," you're out at most 5% of your capital.

To really protect and grow that wealth, you need to adopt a new mindset.

The Best Way to Move Risk and Tax Liability off Your Plate

Leon Cooperman of Omega Advisors ran a wildly successful hedge fund for 25 years. Over that time, he outperformed the market by a wide margin.

He recently announced that, at age 75, he was closing his doors and just investing his money.

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He wrote to investors, "I turned 75 last April. It is my understanding that if you make it past 65 and cancer doesn't get you, you can expect to live on average to 85. Hopefully, I can improve on that average, but in any event, I don't want to spend the rest of my life chasing the S&P 500."

It's simple: If you already have more than enough for you and yours, you don't need to beat the index.

You need to preserve what you have and increase it just fast enough to overcome those two scourges of wealth - inflation and the tax man.

So here's the smart play - the best kind of investments for individuals in this particular boat: Closed-end mutual funds, with a distribution rate of 5% or higher and trading at a 10% or higher discount to net asset value (NAV).

Put 3% of your capital in the 33 funds that have the highest discount to NAV - rebalance every year according to the same criteria.

One of my favorite CEFs: CBRE Clarion Global Real Estate Income Fund (NYSE: IGR). Clarion owns real estate investment trusts (REITs) and real estate securities around the world.

The fund's management team is part of the world's largest real estate investment and management companies, CBRE Group Inc. (NYSE: CBRE). The fund's holdings are spread out all over the world and cover every sector of the global commercial real estate market.

My favorite part is that the shares trade at a discount to NAV of almost 12%, so you're buying into premier properties all over the globe for less than they are actually worth right now. The shares are yielding 7.9% cold, hard cash, so the total return potential for CBRE Global is outstanding.

I'm also a huge fan of Macquarie Global Infrastructure Total Return Fund (NYSE: MGU).

This fund invests in companies and projects around the world that own the infrastructure necessary for the world to work.

You will be invested in airports, railroads, water systems, electrical grids, toll roads, and other absolutely critical infrastructure worldwide.

No matter what the markets or global economy does in the future, these projects will still be necessary for the daily life of billions of people, each of whom will contribute to our coffers.

Best of all, we are buying all this life-sustaining infrastructure at an absolutely mouthwatering discount of over 14% to the actual NAV of the companies.

You better believe we get paid along the way, too; the fund currently yields 5.7%.

Holding these, you'll find yourself with a massively diversified portfolio. If you did this today, you would own some REITs and some infrastructure funds - two of my favorite investments.

You will have a lot of short-term bonds. You will have a bunch of tax-free bond funds. Some of the funds hold preferred stocks, some will own blue chips. Most of them pay cash dividends each and every month, while a few have quarterly payouts.

There's a huge advantage investing this way as opposed to taking tips from cable financial news talking heads. There's a massive de-risking of the portfolio as opposed to owning the hot stocks of the day.

You have regular cash flows coming into the account to soften the sting of any wild market swings. You own lots of bonds and real estate essentially uncorrelated with stock movements.

Best of all, because you only bought funds at a steep discount to NAV, you paid less than full price for everything you own.

Now, I know at this point you're not really worried about return, over and above it beating inflation and taxes, of course, but I can't help but point out this portfolio beats the S&P 500 by 1% over the last decade.

Of course, you almost can't help but beat the index, given how much risk and turnover you've pushed out of the picture with these investments.

Leave index chasing to the cable TV personalities.

And listen: The two funds I mentioned will go a long way to making sure you stay set for life. But I'm putting the finishing touches on a "master list" of funds just like this that offer cash and stability at an unreasonable discount. I'll be back to run it by you the minute it's ready - keep your eyes peeled.

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About the Author

Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.

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