How the Wealthy Invest
Did you ever wonder how wealthy families and wealthy individuals invest their money? Do they put their fortunes into a weighted mix of stocks and bonds like wealth managers advise, or do they invest differently?
As you may have guessed, the wealthy invest their money very differently than a typical investment article would advise. In addition to investing in Wall Street products like stocks and bonds, they put a substantial portion of their assets into alternative investments.
Alternative investments are investment vehicles other than those readily offered by Wall Street. They include but are not limited to: investing in oil and gas exploration, bitcoin, art, startup companies, small businesses, and real estate. Almost every industry you can think of has companies that require equity investments to grow their business. I have a friend who invests in Broadway plays, and does quite well.
There are a number of reasons why the wealthy invest heavily in alternative investments, the primary one being portfolio diversification. Alternative investments are often uncorrelated with the publicly traded markets providing portfolio diversification that is not readily available elsewhere. Modern Portfolio Theory uses alternative investments to greatly improve the risk adjusted return of a portfolio over time. I will delve into this topic further in future articles.
Unlike the packaged products offered on the publicly traded exchanges, alternative investments require a more detailed understanding of the underlying asset, larger minimum investments, and are more time consuming to buy and sell. They also require access to these products, which is the key barrier to entry for most people.
The market for these investments is created by brokers who match investors looking to invest, with those businesses and entrepreneurs who are looking for equity to grow or acquire real estate. These transactions are more time consuming than buying a stock, and therefore required relationship development. Since high net worth individuals make large investments making more money for brokers per transaction, brokers tend to focus on them, and them alone.
At EM Capital our Mission is to provide access to the investment opportunities of the wealthy to everyone, and our Vision is financial freedom for those who chose to partner with us.