Compare the portfolio of the following:
Individual Retail Investor Vs. The Rich
While the average retail investor allocates most of their portfolios to stocks, the rich allocate a majority of their portfolios to private equity and real estate (53% total).
Why do the rich allocate a majority of their portfolios to private equity and real estate vs. stocks? Because stocks offer lower returns with more volatility.
According to a recent Forbes.com article, the average retail investor earned an average annual return of 1.9% over the past 30 years. However, inflation averaged 2.3% over this same period. That amounts to an average yearly loss of .4% experienced by retail investors.
The rich didn’t get rich by losing .4% per year. That’s why they prefer private equity and real estate.
Here are the advantages of Private Equity and Real Estate:
NON-SPECULATIVE. The rich don’t gamble with their money. They like consistency and reliability. The long-term natures of both private equity and real estate offer benefits such as consistent cash flow and growth that stocks don’t offer. To the rich, both income and appreciation, which can be reinvested repeatedly, are necessary for building and maintaining wealth.
Stocks investing that relies on timing the market and anticipating moves before others do is a fool’s errand. Not even professionals are good at predicting market moves. That’s why individual retail investors not only underperform the market, but they underperform inflation as well.
TAX BENEFITS. To the rich, saving a buck is just as important as making one. That’s why tax planning is such an important element of the rich’s investment strategy. For maximizing tax benefits, nothing beats private equity and private real estate investing.
Typically structured as limited partnerships or LLCs, business deductions for expenses like operating costs, insurance, and travel are allocated to the investor’s pro-rata at the partner or member level – resulting in significant tax savings. In addition, real estate investments offer the added benefits of depreciation deductions.
LOW VOLATILITY. The long-term and non-public nature of private market investments like private equity and private real estate insulate them from the volatility of the broader markets. On the other hand, public offerings like stocks are highly liquid – making them extremely susceptible to big market swings from economic and non-economic factors.
Many times, stock movements have nothing to do with economic metrics and more to do with the buzz generated by the news, internet, and social media.
TRUE DIVERSIFICATION. With stocks, diversifying across multiple companies in multiple industries isn’t true diversification. What happens when the whole stock market tanks? Stock diversification won’t save you.
Private equity and private real estate offer true diversification where investors can leverage the expertise of others and diversify across asset segments, geographic locations, compensation type, and fund structure.
Done right and in the right recession-resistant assets, when the broader market retreats, a portfolio dominated by private equity and real estate will not.
The rich are rich because they do things differently than the middle class. The way they allocate assets in their portfolio is one of those ways. Avoiding stocks’ speculative and volatile nature, they turn to private equity and private real estate for above-market risk-adjusted returns.
How is your portfolio allocated?
More like the rich or more like the middle class?
If more like the middle class, then maybe it’s time to reassess and reallocate your portfolio.