What is the secret of the ultra-wealthy?
The secret of the ultra-wealthy is that they invest differently than everyone else. While the middle-class investor gravitates towards stocks and bonds, the ultra-wealthy allocate heavily to different assets. It’s these non-traditional assets that set them apart from the middle-class.
Compare the difference between the middle-class investing habits vs. those of the ultra-wealthy:
The members of Tiger 21, an ultra-high-net-worth investor (UHNWI) peer network, are representative of how the ultra-rich invest and it’s nothing like how the middle-class invest. While the middle-class focus on short-term gains by allocating predominantly to stocks and bonds, UHNWIs allocate predominantly to private investments like private equity (private company investments) and commercial real estate.
Why private investments?
UHNWIs and institutional investors turn to private investments because they’re lucrative – they offer above-market returns. Shunning the traditional stock/bond allocation model favored by the middle-class, UHNWIs and institutional investors eschew traditional investments for private investments for above-market returns and for shelter from Wall Street volatility.
Private investments provide the types of returns Wall Street cannot match without the Wall Street volatility. Cambridge Associates, a private investment firm (CA), found that private investments have provided the strongest relative returns compared to traditional assets for decades. (Private Investing for Private Investors: Life Can Be Better After 40(%). (2019, February)).
CA data supports the outperformance of private investments over 5, 15 and 25-year periods:
Cambridge Associates’ past analysis found that the top performing institutional investors not coincidentally had higher allocations to private investments than their lower performing counterparts.
The value of private investments in a portfolio are undeniable, but they’re not for everyone. In fact, unlike public equities where almost anyone can invest in, private investments by virtue of being private and not being held to the same high disclosure standards of public companies cannot be offered to just anyone.
Whereas investors in public equities are protected through disclosure, investors in private investments are protected through screening where only sophisticated investors of adequate financial means are allowed to invest. This ensures that only investors who understand risk and those who can bear the loss of their investments are allowed to participate.
In terms of qualifying investors for participation in private investments, accreditation status is the most common and accepted form of qualification. For example, most private investments are restricted to Accredited Investors whom the SEC considers capable of understanding the risks of a private investment and for absorbing loss of their investment.
What is an Accredited Investor?
For individuals, the main qualification criteria involve income or net worth. If you fall within one of the following categories, you would meet the definition of an Accredited Investor:
- Having a net worth exceeding $1 million individually or combined with a spouse (excluding value of primary residence).
- Have earned income exceeding $200,000 ($300,000 if combined with a spouse) during each of the last two calendar years, with reasonable expectation of maintaining these income thresholds during the current year.
In recent years, the SEC has expanded the definition of Accredited Investor based on defined measures of professional knowledge, experience or certifications in addition to the existing income and net worth tests. These include persons holding Series 7, Series 65 and Series 82 securities licenses as well as persons with certain professional certifications such as doctors and lawyers.
Access to private investments start with being Accredited. If you’re currently an Accredited Investor, you should be allocating to private investments. If you’re not currently an Accredited Investor, you should be striving to attain Accredited Investor status.
CA data shows a clear positive correlation between returns and allocation percentages to private investments. Figure 1 highlights the value of private investments to a portfolio and the higher the allocation the better the performance of the portfolio.
For example, the median annualized return for a greater than 15% average allocation was 8.1%, 160 basis points higher than the group with a less than 5% allocation:
The financial benefits of private investments to a portfolio are clear: The more you allocate to private investments the better your portfolio performs.
Just ask UHNWIs who allocate heavily to private investments for wealth creation, growth and preservation. Access to these lucrative investments start with being Accredited.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.