Wall Street And The Wealthy Investor

Wall Street is not the darling of wealthy investors. It comes in third place among the assets preferred by the rich for allocation to their portfolios.

Take the asset allocation of the members of TIGER 21, for example:

TIGER 21 is “an exclusive network of wealth creators and preservers, a peer membership organization serving as your own personal board of directors. Our Members consist of successful entrepreneurs, investors, and executives.”

Membership in TIGER 21 is exclusive, with candidates required to show $50M in investable assets to join. Every quarter, TIGER 21 publishes its Asset Allocation Report showing where its members are placing their money. According to the latest report, Private Equity investments (PE) continued at a record high of 31% for the second straight quarter, while Real Estate increased by 1% since the last quarter to 24%.

The members of TIGER 21 consistently allocate more than half of their portfolios towards PE and commercial real estate (CRE), but why?

The latest TIGER 21 report also provides insight into the motivations behind these two assets. In explaining the heavy allocation to these two assets, the report states, “Members are betting long-term on Private Equity and Real Estate.”  Therein lies the appeal of PE and CRE. PE and CRE are unmatched for creating, generating, and preserving long-term wealth insulated from broader market volatility. These alternative assets are what set the wealthy apart from the average investor.

Compare the asset allocation of the wealthy vs. that of the average individual investor:

While the average investor allocates a majority of their portfolios towards stocks, for the wealthy, stocks come in third. The fact that the average retail investor fails to beat the market while the wealthy keep amassing more wealth should tell you everything about the effectiveness of their respective asset allocations.

The difference between allocations to PE and CRE by the wealthy and stocks for the average individual investor is perspective. While the average investor thinks short-term, the wealthy think long-term.

In terms of objective, the two major differences between the wealthy and everyone else (i.e., the middle class) are:

  • The wealthy think long-term and invest and plan beyond their own lifetimes.
  • The wealthy ignore the crowds.


So what do private alternatives like PE and CRE offer that stocks don’t?

Private alternatives like PE and CRE offer the following benefits that public equities cannot offer:

  • Above-market returns.
  • Lower risk.
  • Low Volatility.
  • Inflation hedge.
  • Passive income.
  • Appreciation.
  • Tax Benefits.
  • Leverage the expertise of others.


PE and CRE offer investors multiple benefits, but it all comes down to the dollars and cents and the opportunity to grow those dollars and cents to create wealth and the ability to insulate and preserve that wealth.

For the wealthy, it’s all about return on investment, and cash-flowing private alternatives like PE and CRE offer higher returns and can do so at less risk, insulated from market volatility.


Better Risk-Adjusted Returns

The data shows that the more private alternatives are allocated to a portfolio, the higher the returns that portfolio generates but at less risk – contrary to conventional Wall Street thinking, higher returns only come at the cost of higher risk.

Source: JP Morgan Asset Management


How do PE and CRE generate above-market returns but at less risk? The passive income factor and the noncorrelation of these assets from Wall Street.


Passive Income

Passive income is the difference between cash-flowing PE and CRE on the one hand and stocks on the other. Passive income allows investors to make money in their sleep, and multiple passive income streams are the key to wealth. Leveraging the expertise of others while still reaping the income, appreciation, tax, and volatility-insulating benefits allows the wealthy to compound wealth through the reinvestment of proceeds.

Passive income, along with the underlying appreciation of the asset, offers a one-two punch of returns public equities cannot match.


Noncorrelation To Wall Street

The long-term and illiquid nature of PE and CRE not only fulfills the long-term objectives of wealthy investors but insulates them from Wall Street volatility. This noncorrelation to Wall Street insulates these assets from recession and inflation.

CRE is particularly resilient in the face of inflation. Even as inflation has risen, rents have kept pace or even exceeded inflation in markets nationwide. Owners of these cash-flowing CRE can generate income that counters the destructive effects on buying power from inflation.

It’s clear why the wealthy allocate heavily to PE and CRE and relegate stocks to third place. PE and CRE are just better equipped for generating long-term wealth insulated from broader market volatility.