Editor's Note: This story originally appeared on NewRetirement.
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.
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 Do Alternative Investments Perform?
For the last year, the S&P 500 is up over 32% and, over the past five years, it is up almost 112%. These returns are hard to beat and may be a reason why the percentage of the ultra-wealthy’s money has slightly 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, the recent 12-month and 1-year return on luxury goods as alternative investments is mixed. Here are a few examples:
- Rare whisky is down 4% for the last 12 months, but up 478% in the last 10 years.
- Wine, on the other hand, is up 13% this year and 127% over the last 10.
- Classic cars went up 6% in one year and 193% over the last 10.
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 trend is definitely upward over time.
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 the knowledge to make alternative investing less risky or more predictable.)
- Access to alternative investments.
Bud Hebeler, the late NewRetirement adviser, was not a fan of alternative investments and wrote a piece called the “Unlucky 13.”
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