Most have heard the expression, “The Rich get richer, while the Poor get poorer.”…
But we may have wondered how that relates to us? While that may be a generality, there are investments available to the savvy, experienced investor that most have never heard of. While we always recommend doing your due diligence on any investment, some of what you read below may get the investment fires burning.
If you’re reading this, it’s likely you’ve heard of the traditional investments, stocks, bonds, exchange-traded funds, etc., but there is a world of other opportunities to put your money to work.
So what are these investments reserved for the elite? This likely will not be a definitive list, but it should serve to get you thinking about a variety of ways to watch your nest egg grow. Among these investments are:
- Venture Capital
- Private equity
- Hedge funds
- Real estate investment trusts
- Precious metals
- Rare coins
Not all of these investments are suitable for everyone, but for the bold and brave, they can give you a very high ROI if you guess right. These are not tied to traditional investments, meaning the price of stocks and bonds, does not correlate directly to their price. In most, cases they are usually very liquid but may be difficult to value.
Likely you won’t find these investments at your local bank, maybe not even at your broker; they are alternative investments. Not every alternative investment listed is available to everyone, in some cases only accredited investors have access. This is based on the fact that many fund managers don’t want everyone knowing precisely what’s going on. That’s not said to promote distrust merely that some funds limit investments to those who are experienced. Now could be an excellent time to look into these vehicles as they are becoming more popular as many realize their long term potential.
CASE STUDY HEDGE FUND: In 2017 they made 20.2% on their money. For the last ten years, they’ve made 11% per year. This is a case where they have outperformed the market regularly. Who are they? The Yale Endowment fund and they’ve invested 33% of their $23.9 billion endowment fund in private equity funds.
WARNING: Always do your due diligence before making any investment, particularly with alternative investments. This is not said as a scare tactic; it simply makes good sense to weigh your risk tolerance and to carefully look at your own portfolio. Also, be aware that some of what we’ll mention below, is not protected by the SEC. That in itself does not mean you should invest, simply take caution before doing so.
NOTE: Not all of the investments listed below are available to the retail investor. Speak with your financial advisor on ideas of how to access those that interest you.
Private equity is a term applied to a broad range of investments that include venture capital, start-ups, and financing that may be necessary during a company’s growth. It should be noted that not every company is listed on the New York Stock Exchange, in fact, there are more private companies than public ones, it’s simply that traditional investors may not be aware of them. This type of fund raises money from both traditional and non-traditional investors, using these funds to invest in companies of note. Should a particular company decide later to have an IPO (initial public offering) or another event such as an acquisition, the capital is returned to the investor, fewer management fees of the institution.
Direct Investments aka Angel Investors
With the right connections in the right places, it’s possible to invest in companies directly, without the need for private equity funds. The term for this is angel investing, and it is high risk. Statistically, there are more companies that fail, then those that reach success. There was a time when Apple sought this of capital, but Apple is an anomaly, and we can’t expect that measure of success every time. Depending on the registration exceptions, retail investors can participate in some of these offerings.
This likely isn’t something for the little guys, but we all can dream. A venture capitalist invests in start-up companies, that lack the experience, inventory, and track record to seek traditional investment. Often it is only an idea or prototype of what potentially could be. There are tremendous examples of success, think of Google, Facebook, and Twitter for examples, but also realize there are others that never get out of the starting blocks. Venture capital normally comes from a small group of investors who have access to large sums of risk capital.
Real assets are just that, investments you can hold in your hand, or visit in person. Precious metals commodities, art, wine, real estate, agriculture land and even baseball cards. Investors can participate by actually buying real assets, or participating in funds that deal specifically in this type of investment.
Most investors are aware of hedge funds, though they may not be actively involved, or know the process of being part of one. Hedge funds are similar to private equity funds, but they differ in their investments. Hedge funds invest primarily in the public sector, and depending on the hedge fund manager, will use different strategies to increase the value of their holdings.
Fund of Funds
This one is pretty simple and a perfect way to diversify. Essentially, this is a fund that invests in other funds. By doing this, you’ll have investments across a broad range of asset classes and multiple fund managers.
Private Placement Debt
While most of us don’t like to incur debt, in this case, we’d be participating in the debt of others. We wouldn’t be helping them pay; rather we’d participate in the cash flow received as others pay down their debt. In most cases, this wouldn’t be consumer debt, rather companies that have borrowed for expansion, payroll, or other business costs. This type of investment is not traded publically and not required to be rated. Thus caution is advised.
There is a world of investments available; you simply need to take the time to search them out. Not all are right for everyone, and everyone, particularly the smaller investor, should always invest with their head, not their heart. Simply put, we all want our portfolios to be profitable, but never bet the rent money on a single stock unless you have the risk capital to do so. It’s fine to take risks, that’s the path to greater rewards, which doesn’t mean the path is easy or possibly wrought with dangers.