3 surprising ways the ultra-rich invest their money

How much money do you need to become wealthy? charles schwab A survey conducted last year found that Americans believe they should have a net worth of $2.2 million. However, this is just a fraction of the $30 million needed to become ultra-rich.

As you might expect, the ultra-wealthy 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.

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1. Private equity

The ultra-wealthy, like many Americans, invest large sums of money in stocks. However, alternative investments account for about 50% of the assets owned by the ultra-high net worth, compared to just 5% for the average investor. What are the top alternative investments? Private equity.

Publicly traded companies list their shares on a stock exchange such as the New York Stock Exchange. Nasdaq. Anyone can invest in them. Private equity investing, on the other hand, is only available to institutional and accredited investors with an annual income of at least $200,000 for two consecutive years and/or a net worth of $1 million or more, excluding a principal residence. Holding a Series 7, Series 65, or Series 82 license also qualifies you as an accredited investor.

According to investment firm research, 27% of wealthy people’s portfolios are invested in private equity KKR. This is just shy of the 31% these investors allocate to publicly traded stocks.

Private equity is the only alternative investment that consistently outperforms the average. S&P500 index. However, there was a time when the S&P 500 outperformed private equity.

^PEA data by YCharts

Private equity continues to gain momentum as an investment option. A whopping 79% of institutional investors plan to increase or significantly increase their allocation to private equity by 2025, according to a survey conducted by alternative investment firm PreQuinn.

2. Private credit

According to research by KKR, about 4% of wealthy people’s portfolios are invested in private credit. What is private credit? It is where investors lend money to private companies. In return, they receive interest payments and (hopefully) recoup the full amount of their investment over time.

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

Similar to private equity, private credit is also gaining popularity. 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 items

Some ultra-wealthy people invest in luxury goods. These products include designer handbags, fine wine, classic 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 soared 137%. However, during this period, the S&P 500 achieved his nearly 237% total return. However, 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 typically don’t make up a large portion of the ultra-high net worth’s portfolio. They tend to have low liquidity. Some luxury items can cost a lot of money to maintain. The luxury goods market is also largely unregulated, increasing risk for investors.

better alternative

Investors who aren’t worth more than $30 million don’t have to worry about not investing like the super-rich. As mentioned earlier, most alternative investments do not perform as well as his S&P 500 over the long term.

Warren Buffett, a longtime member of the ultra-rich club, stipulated in his will that most of his family’s inherited cash be invested in low-cost S&P 500 index funds. For most investors, no matter how much money they have, Buffett’s choices are better than any other.