The super-rich invest in stocks and real estate, as many people do. But here are three of their investment choices you might be less familiar with.
How much money does it take to be wealthy? A Charles Schwab survey conducted last year found that Americans think a net worth of $2.2 million is required. But that's only a fraction of the $30 million needed to have an ultra-high net worth.
As you might imagine, the super-rich spend their money in different ways than the average American. They also invest differently. Here are three perhaps surprising ways the ultra-wealthy invest their money.
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1. Private equity
The super-rich put plenty of money in stocks just as many Americans do. However, alternative investments comprise roughly 50% of assets owned by the ultra-wealthy compared to only 5% for the average investor. What's the top alternative investment? Private equity.
Publicly traded companies list their shares on stock exchanges such as the New York Stock Exchange and Nasdaq. Anyone can invest in them. 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 families, 27% of their portfolios are invested in private equity, according to a survey from investing firm KKR. This percentage narrowly trails the 31% allocation these investors have in listed equities.
Private equity is the only alternative investment that has regularly outperformed the S&P 500 index. However, there have been periods when the S&P 500 beat private equity.
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Private equity continues to build momentum as an investing choice. A whopping 79% of institutional investors plan to increase or significantly increase their asset allocation in private equity by 2025, according to a survey conducted by alternative investment firm Prequin.
2. Private credit
Around 4% of high-net-worth families' portfolios are invested in private credit, according to the KKR survey. What is private credit? It's where investors loan money to private companies. In return, they receive interest payments and (hopefully) receive all of their investment back over time.
Private credit is often less risky than private equity. That's because debt holders receive priority if a company files for bankruptcy. However, private credit isn't a risk-free investment. There's still a possibility of a big loss.
Like private equity, private credit is gaining popularity. Prequin found that 67% of institutional investors plan to increase or significantly increase their allocations to private debt (a broader category that includes private credit) by 2025.
3. Luxury goods
Some ultra-wealthy individuals also invest in luxury goods. 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 on Dec. 31, 2022, the Knight Frank Luxury Investment Index soared 137%. However, during this period the S&P 500 delivered a total return of nearly 237%. Some types of luxury goods have beaten the stock market, though. For example, rare whisky prices skyrocketed 373% higher.
There are some good reasons why luxury goods typically don't make up a large percentage of ultra-wealthy individuals' portfolios, though. They tend to be illiquid. Some luxury goods require steep costs for maintenance. The market for luxury goods is also largely unregulated, which increases the risks for investors.
A better alternative
Investors who aren't worth $30 million or more don't need to fret that they aren't investing like the super-rich. As previously mentioned, most alternative investments don't perform as well as the S&P 500 over the long run.
Warren Buffett -- a longtime member of the ultra-high-net-worth club -- stipulates in his will that most of the cash inherited by his family be invested in low-cost . For most investors, regardless of how much money they have, Buffett's choice is a better alternative than any alternative investment.
Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has no position in any of the 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 $65 puts on Charles Schwab. The Motley Fool has a disclosure policy.
FAQs
Investing Only in Intangible Assets
Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold, and even artwork. Real estate continues to be a popular asset class in their portfolios to balance out the volatility of stocks.
What do billionaires invest in the most? ›
Real Estate
Many billionaires have a portfolio of commercial properties, land, and development projects, both for their profit potential as well as the increased stability they can provide to balance out stock holdings. Office buildings are the most popular choice, followed by retail and healthcare facilities.
How much money to be ultra rich? ›
Defining ultrarich
These are people whose net worth — their assets minus their debts — exceeds a staggering $30 million. As of 2022, nearly 395,070 people worldwide held this prestigious title, collectively controlling a mind-boggling $45.4 trillion in wealth.
Where are the wealthy putting their money now? ›
Wealthy individuals put about 15% of their assets into fixed-income investments. These are stable investments, like bonds, that earn income over a set period of time. For example, some bonds, like Series I Savings Bonds, pay 4.3% right now and pay out the interest every six months.
How do the rich use credit cards? ›
If a wealthy American must make a large purchase like a new car or a piece of expensive equipment, they may use their credit card to pay for it and then pay off the balance over time, rather than having to pay for it all upfront. This allows them to have more cash to finance investments or other opportunities.
How do the super rich spend their money? ›
The wealthy invest in retirement consistently, and they also invest in education. They take care of their health and, more often than not, pay their healthcare bills without incurring medical debt. They also tend to purchase high-quality products and food.
How do billionaires avoid taxes? ›
Billionaires (usually) don't sell valuable stock. So how do they afford the daily expenses of life, whether it's a new pleasure boat or a social media company? They borrow against their stock. This revolving door of credit allows them to buy what they want without incurring a capital gains tax.
What does Warren Buffett invest in? ›
Warren Buffett's stock purchases in the most recent quarter include Chubb Limited (CB) and Occidental Petroleum (OXY). HP Inc. (HPQ) and Paramount Global (PARA) are among Warren Buffett's stock sales in the most recent quarter. The Berkshire Hathaway portfolio includes 41 stocks as of May 2024, including Apple Inc.
What investment makes the most millionaires? ›
How the Ultra-Wealthy Invest
| Rank | Asset | Average Proportion of Total Wealth |
|---|
| 1 | Primary and Secondary Homes | 32% |
| 2 | Equities | 18% |
| 3 | Commercial Property | 14% |
| 4 | Bonds | 12% |
7 more rowsOct 30, 2023
Real estate investment has long been a cornerstone of financial success, with approximately 90% of millionaires attributing their wealth in part to real estate holdings. In this article, we delve into the reasons why real estate is a preferred vehicle for creating millionaires and how you can leverage its potential.
Households with a net worth of $1 million or more may be classified as members of the upper class, depending on the definition of class used.
What salary is considered rich for a single person? ›
Based on that figure, an annual income of $500,000 or more would make you rich. The Economic Policy Institute uses a different baseline to determine who constitutes the top 1% and the top 5%. For 2021, you're in the top 1% if you earn $819,324 or more each year. The top 5% of income earners make $335,891 per year.
What are the three things millionaires do not do? ›
Millionaires prioritize avoiding consumer debt, making wise financial decisions, and aligning spending with long-term goals.
Where do millionaires keep their money if banks only insure $250k? ›
Millionaires can insure their money by depositing funds in FDIC-insured accounts, NCUA-insured accounts, through IntraFi Network Deposits, or through cash management accounts. They may also allocate some of their cash to low-risk investments, such as Treasury securities or government bonds.
Which bank do billionaires use? ›
JP Morgan Private Bank
“J.P. Morgan Private Bank is the more elite program serving ultra-high-net-worth individuals,” Naghibi said.
Where do millionaires keep their money if banks only insure 250k? ›
Millionaires can insure their money by depositing funds in FDIC-insured accounts, NCUA-insured accounts, through IntraFi Network Deposits, or through cash management accounts. They may also allocate some of their cash to low-risk investments, such as Treasury securities or government bonds.
What bank do millionaires use? ›
JP Morgan Private Bank
“J.P. Morgan Private Bank is known for its investment services, which makes them a great option for those with millionaire status,” Kullberg said. “With J.P. Morgan, each client is given access to a panel of experts, including experienced strategists, economists and advisors.”
What stocks do rich people own? ›
3 "Magnificent Seven" Stocks Billionaires Are Selling, and the 1 They Can't Stop Buying
- Microsoft (NASDAQ: MSFT)
- Apple (NASDAQ: AAPL)
- Nvidia (NASDAQ: NVDA)
- Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG)
- Amazon (NASDAQ: AMZN)
- Meta Platforms (NASDAQ: META)
- Tesla (NASDAQ: TSLA)
What makes up Musk's net worth. Musk lacks significant tranches of cash; his money is largely tied up in ownership stakes of his companies. To buy Twitter in 2022, he leveraged his large share in Tesla and solicited investors, rather than relying on liquid sums.
