Investing in stocks has traditionally been seen as a key part of building long-term wealth, but that may no longer be the case. A recent Bank of America Private Bank study of high-net-worth individuals found that the majority (75%) of investors between the ages of 21 and 42 do not think it’s possible to achieve above-average returns solely with traditional stocks and bonds.
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The Bank of America survey found that 80% of young investors are now looking to alternative investments, such as private equity, commodities, real estate and other tangible assets. These assets are best utilized by younger investors who have a longer time horizon, that is a 10- to 12-year commitment to build wealth, versus those who want to cash in in the short term.
Investing in alternative assets rather than traditional stocks and bonds can be beneficial to the long-term investor because it enables them to get exposure to a much broader range of markets and securities than they would be able to get through traditional investments.
Unfortunately, some of the assets favored by the wealthy may not be accessible to the everyday investor.
Depending upon the structure of the actual vehicle, the investor may need to qualify in order to purchase the hedge fund or private equity fund, and the qualification could be based on a number of factors, but most commonly it’s net worth and/or income.
One consideration when you’re talking about real assets, like farmland, timber, commercial real estate or ranches, what we often see with high-net-worth clients is that they’re owning a property directly. Because of the cost of these properties, these are often reserved for clients that have much larger net worths. If you have $3 million and a farm is going to cost you $2 million, generally, for diversification reasons, you don’t want to tie up two-thirds of your net worth in just one solution.
However, there are still ways to utilize the strategies the wealthy are using to diversify your own portfolio.
There are publicly traded REITs that clients can invest in. You maybe don’t get the exact same benefit you would if you owned real estate directly, but it does give you a way to at least get some exposure to real estate.
In the case of hedge funds, there are what we call non-traditional mutual funds that are publicly traded mutual funds that employ strategies that are a little bit more like a hedge fund than a simple an equities strategy. Again, you don’t get the same benefits that you would with a hedge fund, but it is a way for investors that don’t qualify to be able to achieve some of the benefits.
Note: Investing in any stock, bond, fund, commodity or real estate is risky. You can lose everything that you invested and more. Be careful before investing in anything.