Top 3 Best Investing Strategies Used by the Ultra-Wealthy

Like many people, the ultra-wealthy invest in stocks and real estate. However, he introduces three investment options that may be less familiar.

How much money do you need to be rich?According to a survey conducted last year by Charles Schwab, Americans believe they need a net worth of $2.2 million. However, this is only a fraction of the $30 million needed to achieve an extremely high net worth.

As you might imagine, the ultra-rich spend their money differently than the average American. They also have different investment methods. He shares three perhaps surprising ways the ultra-wealthy invest their money.

1. Private Equity

The ultra-wealthy, like many Americans, invest large sums of money in stocks. However, alternative investments account for around 50% of the ultra-high net worth’s wealth, compared to just 5% for the average investor. What is the best alternative investment? Private equity.

Publicly traded companies list their shares on exchanges such as the New York Stock Exchange and NASDAQ. Anyone can invest in them. Private equity investing, on the other hand, is only available to institutional and accredited investors with annual income of $200,000 or more and/or net worth of $1 million or more (excluding primary residence) for two consecutive years. Individuals who hold a Series 7, Series 65, or Series 82 license also qualify as accredited investors.

According to a study by investment firm KKR, a wealthy family invests his 27% of his portfolio in private equity. This percentage is slightly lower than the 31% these investors allocate to publicly traded stocks.

Private equity is the only alternative investment that consistently outperforms the S&P 500 index. However, there were times when the S&P 500 outperformed private equity.

Private equity continues to be a popular investment opportunity. A whopping 79% of institutional investors plan to increase or significantly increase their private equity asset allocation by 2025, according to a survey by alternative investment firm Prequin.

2. Private credit

According to KKR research, approximately 4% of wealthy households’ portfolios are invested in personal loans. What is a private credit? Here investors lend money to private companies. In return, they receive interest payments and (hopefully) recover their entire investment over time.

Private credit are often less risky than private equity. This is because when a company files for bankruptcy, creditors have priority. However, personal loans are not a risk-free investment. There is still the possibility of significant losses.

Similar to private equity, private loans are becoming increasingly popular. Prequin research found that 67% of institutional investors plan to increase or significantly increase their allocation to private debt (a broader category that includes private credit) by 2025.

3. Luxury Goods

Some ultra-wealthy people invest in luxury goods. These products include designer handbags, fine wine, vintage cars, watches, jewelry, and more.

Are luxury goods a good investment? Yes and no. Over the 10-year period ending December 31, 2022, the Knight Frank Luxury Investment Index rose 137%. However, the S&P 500 achieved a total return of nearly 237% during this period. But some types of luxury goods have outperformed the stock market. For example, the price of rare whiskey increased by his 373%.

However, there are several good reasons why luxury goods do not typically make up a large portion of the portfolios of the ultra-wealthy. They tend to have low liquidity. Some luxury items require high maintenance costs. The luxury goods market is also largely unregulated, increasing risk for investors.

A Better Alternative

It’s okay for investors who don’t have a net worth of $30 million or more to not feel like they are investing like the super-rich. As was already established, in the long run, most alternative investments underperform the S&P 500.

Longtime member of the ultra-high-net-worth club Warren Buffett directs in his will that the majority of the money his family inherits be placed in cheap S&P 500 index funds. Regardless of wealth, Buffett’s selection is a superior option than any alternative investment for the majority of investors.