You have seen the headlines, the rich are getting richer. How do they do it? The obvious answer is that they have lots of money and invest that money to make lots more money. However, they also invest differently than more average people. Alternative investments are usually part – often a big part – of their asset allocation mix.
What Is an Alternative Investment?
An alternative investment is anything outside of the traditional asset classes like stocks, bonds and cash.
Alternative investments could include: private equity, venture capital, hedge funds, managed futures, art, antiques, wine, and real estate.
Currencies are usually considered a traditional investment, but cryptocurrencies are considered an alternative investment.
How Much Do the Ultra Wealthy Put into Alternative Investments?
The ultra rich allocate 30-50% of their working capital to alternative investments. (The wealthier they are, the more goes to alternatives.)
A few key findings from KKR, a global investment firm, about alternative investments:
- Ultra high net worth families had about 50% of their assets in alternative investments.
- High net worth investors (those with over $1 million) allocated 26% of their assets to alternative investments.
- Alternative investments make up only 5% of the average investor’s portfolio.
How Much Should You Put into Alternative Investments?
The ideal asset allocation will vary greatly depending on your net worth, goals, and time horizons. The percent that the ultra wealthy put into alternative investments is a function of just how much money they have. They have a lot more to play with.
In most cases, alternative investments should be made with “play” money, not money that you want or need to achieve your financial goals.
How Do Alternative Investments Perform?
For the year to date at Nov. 9, the S&P 500 is up around 13% but, over the past 5 years, it is up almost 40%. declined in alternative investments.
Returns on alternative investments are more difficult (less formalized with less regulation and transparency) to quantify than stock market returns. However, here are a few benchmarks for alternative investments.
- The Cambridge Associates U.S. Private Equity Index reports that the average return in 2020 was 27.8% and 15.8% between 2011 and 2020.
According to Knight Frank, 2023 returns on luxury goods as alternative investments are mixed. Here are a few examples:
- Watches are up between 7-12%
- The values of rare whiskies have fallen.
- Wine, on the other hand was up. Witih Burgundy as the big success story with prices going up 367%.
- The value of cars was uneven. Ferraris lost 15%, Mercedes lost 10%, Porsches lost 5%, and BMWs gained & each Lamborghinis gained 9%.
Masterworks.io, a platform for investment in “blue-chip art,” reports that contemporary art prices outperformed the S&P by 174% between 1995 and 2020.
Real estate investments can be hard to quantify. The location and the type of property have a huge impact on returns. However, according to the National Council of Real Estate Investment Fiduciaries (NCREIF), as of Q1 2021 the average 25-year return for private commercial real estate properties held for investment purposes slightly outperformed the S&P 500 Index.
There is no point in trying to document returns on cryptocurrencies as they swing wildly up and down. Though the big names have trended down in the last year or so.
Should You Invest in Alternative Investments for Retirement?
There is not a right answer to the question of whether you should invest in alternatives for retirement.
The answer will depend on a variety of factors, including your:
- Net worth or the amount of money you have to invest. Oftentimes, alternative investments require a great deal of money to be eligible to make the investment.
- Overall investment goals and time horizons.
- Appetite and tolerance for risk.
- Expertise in an alternative investment. (If you are an expert in something, you may have knowledge to make alternative investing less risky or more predictable.)
- Access to alternative investments.
Bud Hebeler, the late NewRetirement advisor, was not a fan of alternative investments and wrote a piece called the “Unlucky 13.”
Want good investment advice? Try these 28 retirement investing tips.