How much money does it take to become rich? A charles schwab A survey conducted last year found that Americans think they need a net worth of $2.2 million. But that’s only a fraction of the $30 million needed for an extremely high net worth.
As you can imagine, the ultra-rich spend their money in different ways than the average American. They also invest in different ways. Here are three possibly surprising ways the super-rich invest their money.
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1. Private Equity
Like many Americans, the super-rich invested a lot of money in stocks. However, alternative investments comprise about 50% of the assets owned by the ultra-rich, compared to only 5% for the average investor. What is the top alternative investment? private equity.
Publicly traded companies list their shares on stock exchanges such as the New York Stock Exchange nasdaq, Anyone can invest in these. Investing in private equity, on the other hand, is only available to institutional investors and accredited investors who have an annual income of at least $200,000 for two consecutive years and/or a net worth of $1 million or more, excluding their primary residence. Holding a Series 7, Series 65, or Series 82 license also qualifies a person as an accredited investor.
Among high net worth households, 27% of their portfolios are invested in private equity, according to a survey by the investment firm KKR, This percentage is slightly behind the 31% allocation of these investors to listed equities.
Private equity is the only alternative investment that has consistently outperformed S&P 500 Index. However, there have also been times when the S&P 500 outperformed private equity.
^ PEA data by YCharts
Private equity is gaining momentum as an investment option. According to a survey conducted by alternative investment firm Prequin, 79% of institutional investors plan to increase or significantly increase their asset allocation to private equity by 2025.
2. Personal Loan
According to the KKR survey, about 4% of the portfolios of high net worth households are invested in private debt. What is personal loan? This is where investors lend money to private companies. In return, they receive interest payments and (hopefully) will get all of their investment back over time.
Private debt is often less risky than private equity. This is because debt holders get priority if a company files for bankruptcy. However, private debt is not a risk-free investment. There is still a possibility of huge loss.
Like private equity, private debt is gaining popularity. Prequin found that 67% of institutional investors plan to increase or significantly increase their allocation to private debt (a broad category that includes private debt) by 2025.
3. Luxury goods
Some ultra-wealthy individuals also invest in luxury items. These goods include designer handbags, fine wines, classic cars, watches, jewelry and more.
Are luxury goods a good investment? Yes and no. Over the 10 years ending December 31, 2022, the Knight Frank Luxury Investment Index is up 137%. However, the S&P 500 delivered a total return of nearly 237% during this period. However, some types of luxury goods have outperformed the stock market. For example, prices for rare whiskeys soared 373% higher.
However, there are some good reasons why luxury goods do not generally make up a large percentage of the portfolios of ultra-wealthy individuals. They are liquid. Some luxury items require huge costs for maintenance. The luxury goods market is also largely unregulated, increasing the risks for investors.
a better option
Investors who don’t have a net worth of $30 million or more don’t need to worry that they aren’t investing like the super-rich. As mentioned earlier, most alternative investments do not perform as well as the S&P 500 over the long run.
Warren Buffett – a longtime member of the ultra-high-net-worth club – stated in his will that most of the cash his family inherited would be invested in low-cost S&P 500 index funds. For most investors, no matter how much money they have, Buffett’s picks are a better choice than any alternative investment.
Charles Schwab is an advertising partner for Motley Fool company The Ascent. Keith Speights has no position in any stocks mentioned. The Motley Fool has positions in and recommends Charles Schwab and KKR. The Motley Fool recommends Nasdaq and recommends the following options: Short March 2024 puts at $65 on Charles Schwab. The Motley Fool has a disclosure policy,