You’ve probably seen the headlines: The rich are getting richer. How are you doing? The obvious answer is that they have a lot of money and are investing that money to make more money. However, they also invest differently than the average person. Alternative investments typically make up a portion, often a large portion, of an asset allocation mix.
What are alternative investments?
Alternative investments are those outside of traditional asset classes such as stocks, bonds, and cash.
Alternative investments include private equity, venture capital, hedge funds, managed futures, art, antiques, wine, real estate, and more.
Currencies are usually considered traditional investments, while cryptocurrencies are considered alternative investments.
How much do the ultra-high net worth invest in alternative investments?
Ultra-high net worth individuals allocate 30-50% of their working capital to alternative investments. (The richer they are, the more things go to alternatives.)
some important discoveries KKRHere’s what the global investment firm has to say about alternative investments:
- The ultra-wealthy had about 50% of their assets invested in alternative investments.
- High-net-worth investors (those with assets of $1 million or more) allocated 26% of their assets to alternative investments.
- Alternative investments make up just 5% of the average investor’s portfolio.
How much should I invest in alternative investments?
Your ideal asset allocation will vary greatly depending on your net worth, goals, and time horizon. The percentage that ultra-high net worth individuals put into alternative investments is determined by how much money they have. They have a lot more to play with.
In most cases, alternative investments should be made with “play” money, rather than money needed to achieve financial goals.
How do alternative investments work?
As of Nov. 9, the S&P 500 index is up about 13% since the beginning of the year, but is up about 40% over the past five years. Alternative investments declined.
Alternative investment returns are more difficult to quantify than stock market returns (less regulated, transparent, and formalized). However, here are some benchmarks for alternative investments.
private equity
- According to the Cambridge Associates US Private Equity Index, from 2011 to 2020, the average return in 2020 was 27.8% and 15.8%.
luxury goods
according to knight frank, 2023 returns on luxury goods from alternative investments vary. Here are some examples:
- Watches increased by 7-12%
- The value of rare whiskey has fallen.
- Meanwhile, wine prices rose. Burgundy was a huge success story, with prices increasing by 367%.
- The value of the cars varied. Ferrari’s profit decreased by 15%, Mercedes’ profit decreased by 10%, Porsche’s profit decreased by 5%, BMW’s profit increased, and Lamborghini’s profit increased by 9% each.
contemporary art
Masterworks.io, a “blue chip” investment platform, reports that from 1995 to 2020, contemporary art prices outperformed the S&P by 174%.
real estate
Real estate investing can be difficult to quantify. Location and property type have a significant impact on profits. However, according to the National Council of Real Estate Investment Fiduciaries (NCREIF), as of the first quarter of 2021, the average 25-year return for private commercial real estate held for investment purposes was slightly higher than the S&P 500 Index.
cryptocurrency
Cryptocurrencies fluctuate so much up and down that there is no point in trying to document their returns. However, over the past year or so, the number of big names has been on the decline.
Should you invest in alternative investments for retirement?
There is no right answer to the question of whether you should invest in retirement alternatives.
The answer depends on a variety of factors, including:
- Net worth, or the amount of money you have to invest. Alternative investments often require a large amount of capital to qualify for the investment.
- Overall investment goals and time horizon.
- Appetite and risk tolerance.
- Alternative investment expertise. (If you are an expert in something, you may have knowledge that can make alternative investments less risky or more predictable.)
- Access to alternative investments.
The late New Retirement advisor Bud Hebeler was not a fan of alternative investments and wrote an article called “Unlucky 13.”
Need some great investment advice? Try these 28 tips for investing for retirement.
