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How much money does it take to be wealthy? A Charles Schwab survey conducted last year found that Americans think a net worth of $2.2 million is required. But that's only a fraction of the $30 million needed to have an ultra-high net worth.
As you might imagine, the super-rich spend their money in different ways than the average American. They also invest differently. Here are three perhaps surprising ways the ultra-wealthy invest their money.
1. Private equity
The super-rich put plenty of money in stocks just as many Americans do. However, alternative investments comprise roughly 50% of assets owned by the ultra-wealthy compared to only 5% for the average investor. What's the top alternative investment? Private equity.
Publicly traded companies list their shares on stock exchanges such as the New York Stock Exchange and Nasdaq. Anyone can invest in them. Investing in private equity, on the other hand, is only available to institutional investors and accredited investors who have an annual income of at least $200,000 for two consecutive years and/or a net worth of $1 million or more excluding their primary residence. Holding a Series 7, Series 65, or Series 82 license also qualifies a person as an accredited investor.
Among high-net-worth families, 27% of their portfolios are invested in private equity, according to a survey from investing firm KKR. This percentage narrowly trails the 31% allocation these investors have in listed equities.
Private equity is the only alternative investment that has regularly outperformed the S&P 500 index. However, there have been periods when the S&P 500 beat private equity.
Private equity continues to build momentum as an investing choice. A whopping 79% of institutional investors plan to increase or significantly increase their asset allocation in private equity by 2025, according to a survey conducted by alternative investment firm Prequin.
2. Private credit
Around 4% of high-net-worth families' portfolios are invested in private credit, according to the KKR survey. What is private credit? It's where investors loan money to private companies. In return, they receive interest payments and (hopefully) receive all of their investment back over time.
Private credit is often less risky than private equity. That's because debt holders receive priority if a company files for bankruptcy. However, private credit isn't a risk-free investment. There's still a possibility of a big loss.
Like private equity, private credit is gaining popularity. Prequin found that 67% of institutional investors plan to increase or significantly increase their allocations to private debt (a broader category that includes private credit) by 2025.