Many people typically invest in order to make their money work for them. With such a wide range of investment products that are available, where do investors allocate their money? These are questions that many affluent and high-net-worth-individuals may ask. Below we’ll discuss an overview of the various investment vehicles that exist, how the wealthy allocate their investments, and then finally, how investors can access these investments.
Before going over the various opportunities available to investors, below are some terms that delineate various investor types. Depending on an investor’s risk appetite, amount of investible assets and investment goals, investors may be attracted to different asset classes. Certain investment opportunities may only be available to accredited investors, while others have stricter restrictions and are available to qualified purchasers only.
Ultra High Net Worth Individuals (UHNWIs)
- A person with liquid, investable assets of at least $30 million, excluding personal assets and property such as one’s primary residence, collectibles, consumer durables
High Net Worth Individuals (HNWs)
- A person with liquid, investable assets of at least $1 million
Affluent Investors
- A person is considered to be “affluent” if they have less than $1 million but more than $100,000 in investable assets
Accredited Investors must meet at least one of the following criteria:
- Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year
- Has a net worth of over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence)
- Is a trust, with total assets in excess of $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person
- Is any entity in which all of the equity owners are accredited investors
Being wealthy can mean different things to different individuals, and depending on one’s investment goals (investing for retirement vs. investing for alpha) and risk appetite (conservative vs. aggressive), investors may choose to participate in different asset classes.
Whether you’re a novice or an experienced investor, it’s a good idea to familiarize yourself with the various assets out there. The below is an expansive list of such investment opportunities. To help minimize risk and gain alpha, many investors diversify their portfolios and invest in various asset classes. So what forms of investments do the wealthy typically invest in? Here is a list of what many wealthy investors typically have in their investment portfolios.
Savings
- Interest bearing bank deposits such as a savings account or certificate of deposit that earns interest
- Cash
Public Stocks / Equities
Stocks & Bonds
- Stocks, also referred to as “equities”, are securities that give investors a share of ownership in a company. When people refer to “buying stocks”, they are typically referring to buying stocks of a public company that are listed on a stock exchange.
- Fixed-income security is a type of investing in which the investor receives a fixed amount at regular intervals
- Examples of fixed-income securities include government bonds, municipal bonds, etc.
Mutual Funds
- Mutual funds are investment programs that invest in a collection of stocks, bonds, money market instruments, and others.
- Typically managed by a professional money manager who reviews the portfolio on an ongoing basis.
ETFs
- ETFs (exchange traded funds) are funds that track an index (i.e. NASDAQ, S&P 500, Dow Jones), commodities, or bonds.
- Meant to replicate the market’s performance, not necessarily to beat the market.
- Learn the difference between ETFs and hedge funds.
REITs
- REITs (real estate investment trusts) are securities that invest in real estate through property or mortgages. They are often traded on major stock exchanges.
Private Investments / Illiquid Alternative Investments
Real Estate
- Investing in real estate refers to buying buildings and land, whether they be residential (houses, condominiums), commercial (office building, warehouses), or industrial (factories, mines, farms).
Private Equity and Venture Capital
- Both private equity and venture capital funds pool investments to invest in private companies.
- Private equity funds invest and acquire equity ownership in private companies, typically in high-growth stages.
- Venture capital funds typically invest in startups and small- and medium- size private companies.
- Learn the major similarities and differences between private equity and venture capital funds.
Hedge Funds
- Hedge funds pool investments to invest in a variety of assets.
- Strategies aim to provide attractive risk-adjusted returns.
- Read more about 8 hedge fund strategies good for investors to know.
Collectibles / “Passion” Investments / Uncommon Alternative Investments
- Art
- Cars
- Wine
- Farmland
- Timber
Liquidity vs. Returns
Liquidity may be more important to some investors than to others. The below graph illustrates estimated illiquidity vs. expected compounded annual returns. According to this graph, the more illiquid an investment is, the higher the expected returns.
While illiquid alternative investments may not be a good fit for everyone, they are certainly an integral part of an investor’s investment portfolio.
Asset Allocation of the Wealthy
So now that we’ve shared the kinds of investments that are available to investors, how do they typically allocate their assets amongst the various instruments?
Below is a survey from the World Wealth Report 2015 by Capgemini and RBC Wealth Management that outlines the breakdown of high-net-worth-individuals’ financial assets, grouped by region.
According to this survey, it shows that HNWIs’ asset allocations in North America typically include:
- Equities – 33.9%
- Cash & cash equivalents – 23.7%
- Real Estate – 12.3%
- Fixed Income – 18%
- Alternative Investments – 12.2%
Another famous asset allocation model many institutional investors reference is David Swensen’s model for the Yale University Endowment. David Swensen has been Yale University’s Chief Investment Officer over the past two decades. Under his leadership, Yale University’s endowment grew from $3.5 billion to $23.9 billion with a 13.9% return per annum. The Yale endowment model is known for portfolio diversification with assets allocated more heavily towards alternative investments such as private equity, hedge funds, and real estate. Given its impressive track record, many investors refer to the Yale model when it comes to asset allocation. For fiscal 2015, a breakdown of Yale’s asset allocation consisted of the following:
- Private Equity- 31%
- Absolute Return- 20%
- Real Estate- 17%
- Foreign Equity- 13%
- Natural Resources- 8%
- Domestic Equity- 6%
- Bonds and Cash- 5%
How to Access Various Investment Vehicles
Some investments are easier to access than others. For instance, anyone can simply go online today to purchase equities, stocks, bonds, mutual funds, REITs and ETFs. On the other hand, alternative investments such as private equity, hedge funds, and venture capital have been known to be more difficult to access in the past. Why? This was mostly due to high investment minimums and the lack of infrastructure that allowed investors to easily access asset managers and funds. Institutional investors and qualified purchasers were typically the only ones that were able to tap into alternative investments. Now however, technology infrastructures such as DarcMatter are allowing asset managers and investors to more fluidly connect and access one another.
There is no perfect formula when it comes to allocating your assets. Investors should check with their financial advisors to see what investments best fit depending on their goals, risk appetite, and eligibility.
—
DarcMatter (“DM”) is a global fintech platform that streamlines the capital raising process for asset managers and provides investors with transparent and direct access to funds in the asset management industry.
DM’s mission is to enhance capital flow through fintech to create transparency and efficiency by providing direct access to funds in the Asset Management industry for Accredited Investors, Advisors, and Asset Managers.
