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May 14, 2020

Asset Allocation: What the Wealthy Do Differently

If you are looking to build wealth, it is important to understand what the wealthy do differently from us in managing their finances and growing their assets. One of the biggest differences lies in how they allocate their investment dollars.

While everyday investors tend to focus their investments on the stock market (while perhaps adding a dash of fixed-income instruments), the high net worth engage in a much broader spectrum of assets and strategies. It is these that help them outpace the returns of ordinary investors and build their wealth.

We break down the types of assets and strategies that the wealthy use to build their wealth to provide you with a framework for planning your own wealth building path.

1. Leverage Alternative Assets

Ordinary investors typically look at investing as being synonymous with buying and selling stocks and bonds. This is why their portfolio is made almost exclusively of these. Wealthy investors, on the other hand — while they do invest heavily in these types of assets — also invest a significant portion of their portfolio in alternative assets, which can include:

  •   Private equity and venture capital
  •   Hedge funds
  •   Real estate
  •   Commodities
  •   Tangible assets

According to statistics compiled by TIGER 21, high net-worth individuals commit the vast majority of their investments to alternatives. This includes a nearly 30% allocation to real estate alone.

The reason that the wealthy invest in these types of assets is that they can generate much higher returns than stocks and bonds. But ordinary investors rarely invest in them in part because they lack knowledge of these products but mostly because these assets require significant amounts of capital to access.

A good example of this access limitation is multifamily real estate (such as residential apartment buildings). Assets of this type generally outperform the stock market, and the market for these assets is historically less volatile, making them a very attractive investment opportunity. However, only wealthy individuals typically have the ability to purchase a multifamily dwelling for investment purposes and properly manage it.

2. Private Market Investing

Another big difference between wealthy investors and ordinary ones is the type of markets that they invest in. While most of us almost universally limit our investments to public markets such as the stock market, wealthy investors understand that the real money is to be found in private markets. This is because private markets are generally much smaller and so there is less competition for assets, and also because these assets usually have greater growth potential.

This is why the wealthy commit more than 50% of their investments toward private markets, according to TIGER 21.

Most investors eschew private markets for a number of reasons, such as the sense of security that comes with participating in a government-regulated public market. But these investors also lack access to many private markets, as they are often limited to accredited investors. In the United States, an individual who either has had income of at least $200,000 for the past two years ($300,000 for couples) or has a net worth of at least $1,000,000 can qualify as an accredited investor. Less than 10% of the country’s population qualifies under these criteria.

In recent years however, technology and changes in federal regulations have spurred the emergence of a new category of investment platforms who now offer non-accredited individuals the option to invest in these types of markets and assets, without the high cost of entry. DiversyFund is one of them, offering all investors the same opportunity as wealthy ones to invest in private market assets. 

3. Long-Term Strategy

Everyday investors who lack the know-how for long term wealth building have an unfortunate tendency to jump from one short-term investment strategy to another, depending on whatever the prevailing trend happens to be at the moment. They are also likely to be the first one to jump ship at the first sign of trouble. Because of all this, they often purchase an asset when it is near its high point and sell it when it is near its low, and this is obviously not conducive to building wealth.

Wealthy investors, on the other hand, tend to put their money in long-term investments that have historically performed well. They come up with an investment strategy and stick with it, no matter what the hot investment trend currently is or how poorly their investments may be doing at some given moment. Like the legendary tortoise, whose slow and steady approach to the race beats the hare, investing long-term usually wins.

Despite what you may have been led to believe, the wealthy possess no magic that allows them to build wealth that others cannot. In fact, a 2017 survey from Fidelity Investments found that 88% of millionaires in the U.S. are self made. What is different about them is that they invest their money strategically. Anyone looking to build wealth can start following the same principles.

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