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Investment options for high net worth individuals range from the mundane to the glamorous.
You need a net worth of $1 million to be considered a high net worth individual—commonly referred to as an HNWI. That means being an HNWI is not uncommon for upper middle class or even middle class Americans who have diligently saved in their 401(k) plans. In fact, there were more than 7.9 million HNWIs in North America in 2021.
While not all high net worth individuals are shopping for their own private island, they may want to consider investment options that go well beyond the latest and greatest mutual funds.
HNWIs tend to have a greater appetite for risk, longer time horizons and less need for highly liquid assets. They want to minimize taxes, preserve their wealth and pass it on to the next generation. And they may qualify as accredited investors, giving them the opportunity to invest in privately traded, unregulated investments.
Commercial Real Estate
Commercial real estate could mean owning apartments, shopping centers, office buildings, gas stations, storage facilities or industrial condos, among many other options. Often, it also means hiring a property management company to handle things like building maintenance and tenant requests.
Each type of commercial real estate has unique risks and rewards, but common benefits include cash flow, hedging against inflation and deferred capital gains taxes through 1031 exchanges. Plus, if you’re a good landlord, you could play an important role in bettering the communities you invest in.
Don’t want to be a landlord or want more diversification? No problem. You can still gain exposure to this sector through real estate investment trusts, and private REITs such as Fundrise. There are also a wide variety of exchange-traded funds that invest in REITs.
Private Equity
Investing in private equity is a great choice for HNWIs. Private equity firms own stakes in companies that aren’t publicly traded. They also buy troubled public companies, take them private and restructure them.
Since high net worth individuals tend to own plenty of stocks, buying into private equity offers good diversification and potentially higher returns.
According to the private investment firm Cambridge Associates, its U.S. Private Equity Index outperformed the S&P 500 public market equivalent by nearly five percentage points over the 30 year period ending December 31, 2019.
Keep in mind, returns can be better or worse depending on the period examined and the benchmarks used to compare private equity to public companies. Also, data about private equity investment performance is proprietary, which means it’s not always available the way public stock performance data is.
Private Infrastructure
Private infrastructure includes the utilities and services everyone depends on to maintain our cities and communities. Water utilities, fiber optic lines, cell towers, toll roads, airports, electrical grids and solar power may all be funded by private investors.
Often referred to as infrastructure private equity, there are four main vehicles for investing in private infrastructure: closed-end private funds, direct deals, listed funds and open-end funds. HNWIs can work with private bankers to get access to these vehicles. You can also directly invest in companies that own private infrastructure.
Broadly speaking, this asset class can provide steady returns and good protection from inflation, though returns may be lower compared to private equity. The main reason to favor private infrastructure might be to pursue social, environmental or political goals, such as investing in renewable energy.
That said, private infrastructure funds may give your portfolio excessive volatility and below-market returns, according to one study. Proceed with caution if you’re considering this alternative investment.
Private Credit
If a company needs to borrow money and it doesn’t want to issue bonds or get a bank loan, it might turn to private credit. This form of borrowing can be faster, more customizable and also help maintain privacy—think of it like borrowing money from a friend instead of a bank.
However, while a friend might offer a below-market rate, private credit tends to have higher interest rates than other forms of credit, in part because it’s far less liquid. You can’t just sell, transfer or redeem a private loan whenever you want. Also, the rate is typically variable, which can be appealing in a rising-rate environment (and unappealing in a falling-rate environment).
Extending private credit can be a good way to diversify a passive income stream while potentially boosting your returns. There are tons of ways to do it, from being the sole provider of a business loan to participating in a private credit fund. Loans can be secured—by aircraft, railcars or receivables, for example—or unsecured, and made to companies of any size, age or industry.
Government Bonds
Diversified municipal bond funds can be a go-to choice for HNWIs who have maxed out other tax-advantaged places to put their money. Municipal bond income is generally not taxable at the federal level. Plus, if you buy municipal bonds issued by your state of residence, you’ll generally avoid state and local income taxes, too.
Broadly speaking, municipal bonds are considered a safe investment with a low default rate. General obligation bonds can be particularly low risk since they are backed by the issuer’s taxing authority. And bonds held to maturity allow investors to preserve their capital.
For similar reasons, U.S. Treasury securities can be an appealing choice for HNWIs. I-bonds and Treasury Inflation Protected Securities also offer inflation protection. Just keep in mind that interest from Treasurys is taxable at the federal level.
Corporate Bonds
Corporate investment-grade bonds offer higher potential returns than government bonds and munis while still being relatively low risk and preserving your capital.
They allow you to lend money to publicly traded companies who are likely to pay you back with interest at regular intervals. And corporate bonds are a huge market, with $453.9 billion issued in the first quarter of 2023, of which 88.2% were investment grade, according to SIFMA, a trade association for the U.S. securities industry.
If a company does get into trouble, it will repay its bondholders before its stockholders, and corporate bonds—especially when you own them in the form of bond funds—are far more liquid than owning real estate or investing in a private equity fund.
One downside is that the value of your fixed-income payments can be eroded by inflation, and a bond’s face value is sensitive to changes in interest rates.
Alternative Investments Can Be Fun, but It’s OK To Be Boring
Having a high net worth opens up alternative investment opportunities—and the potential for higher returns. However, having more than $1 million in the bank doesn’t mean you have relationships and knowledge required to buy into these investments and make sound decisions—or that you’re interested in developing them.
If you don’t want to work with a private banker, learn to evaluate a private equity fund or start speculating on Bordeaux, you don’t have to.
It’s fine to stick with the same investments that likely got you where you are today, things like dividend stocks, your own business and an S&P 500 ETF, combined with high-yield savings accounts and money market funds that help your cash keep up with inflation. Save your free time for the tennis court.
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