If you are very wealthy, you do not content yourself with the paltry returns offered by bonds (less than 2%), or buy stocks (with the hope of appreciation). I have noticed that there are a lot of “private equity” firms around, that offer huge returns (often by buying companies, restructuring them, and re-issuing stock in the newly reorganized firms). Can small investors participate in this? Or is it strictly for multi-millionaires?
If you don’t have much money - like say you only have $200,00 - you’re options are a lot more limited than if you have over a million. Million tends to be a minimum cutoff point for a lot of investment firms. One of the big differences is the fee structure is different; flat rate vs. percentage.
That’s about all I know; when I got a million dollars maybe I can give you an update.
ETA: Vanguard
There’s a recent (like, year-and-a-half old) story on the bbc on the topic. Basically, businesses, property, and airplane leasing.
Hedge funds, for one thing. They’re supposed to be only for sophisticated investors, so in the US, they require that the investor have a minimum of five million in investment assets (not all of which needs to be invested with the hedge fund). There might be a management fee of one percent and a performance fee of 20% of the increase in value each year.
Some of these guys do really well, with double-digit returns year in and year out. But I’m skeptical that they can all do that well consistently.
So my vast fortune is almost entirely invested in low-cost index funds.
One investment that rich people use is life insurance. This is one of the biggest differences between rich people and everybody else. Life insurance, at least in the U.S., is one of the best ways to transfer money between generations. A life insurance payout is always exempt from income tax.
Indexed life insurance is, in particular, very popular right now. Tie the cash value to the S&P, put a double digit cap on it, put in a grand a month for 20 years and have very safe growth to pass on to your kids tax free plus the cash value will be worth more than they premiums paid in relatively quickly.
This guy writes a lot about it. But he isn’t the only one.
My fortune is only half-vast but I do the same. IIRC, Vanguard, the best place for index funds, only requires $3,000 to open an account.
One reason (perhaps the only reason) poor people don’t use life insurance to transfer assets between generation is their estates are too small to be subject to estate taxes.
A grand a month for twenty years is middle class poverty. No really wealthy person goes this route. Putting in a hundred grand a month isn’t wealth. Besides, passing money on to your kids means it is tied up for your lifetime.
I’d put a bottom limit on wealth at eight figures for a portfolio. Those people are almost always diversified. Stocks are always popular, bonds for income and stability, REITs and property holdings offer good opportunities for growth, venture capitalism does with a bit more risk, future trading is risky but rewarding, investments can be made in almost anything from backing a movie to backing a oil well.
Most of these are available in one form or another for small investors. It’s that “one form or another” that’s the limitation. Much of the good stuff is taken by people who can afford to put in millions: why even bother with the paperwork for someone contributing a thousand? Small investors also have to be cautious about risk. A billionaire losing $100 million still has a billion dollars. If you lose $100,000 you’re in a big hole.
I’m not suggesting it, just saying it’s popular. Maybe not for the super wealthy but for your average work a day millionaire it’s a popular way to park a bit of estate money. With an IUL the money isn’t tied up either. I’m not going to get into it, and it should not be anyone’s only investment, but it really is very popular. LIMRA keeps the stats.
When you are rich, there are a slew of options available regular folk can’t affordable use.
Just in avoiding estate taxes, here’s one really great loophole the Walton family is using.
Consider tax-free municipal bonds. Lower returns than taxable ones, often, but then no tax on interest. If you are in a lower bracket, it’s usually a loss. But for the top bracket, it’s usually a win.
The very low tax on capital gains, especially long term, is a huge plus for richer people.
The last two, it doesn’t take a lot of money to gain from them. But regular working folk don’t really benefit. If you are rich-rich, the ways of gaming the system are astonishing. And more ways are added every time there’s a tax reform bill.
The Wall Street companies treat regular investors in mutual funds as money sources. They game those accounts against the accounts of their wealthy clients. So the little people gain a little bit, if that, while the big fish win big.
I am a lawyer who works with the investment management industry, so perhaps have something to bring to the table here.
As to the first question: Wealthy people often have most of their wealth tied up in the business that made them wealthy. For their other assets, though, they generally believe in diversification. Contrary to what you may have heard, they do not have a magic way of safely making more than is available from stocks and bonds, and they generally do invest in stocks and bonds. These investments may be direct, or they may be indirect, through mutual funds, hedge funds, or other investment vehicles. Typically they will have other investments as well, such as real estate and commodities. They may indeed hold private equity investments (i.e., investments in stocks that are not publicly traded, such as high-tech startups), and these may be made directly or through private equity funds.
As to the second question: If you want to invest in private equity, you will need to be an accredited investor. If you want to invest in a private equity fund (or, for that matter, a hedge fund), which essentially means that you will hire someone with more investment knowledge and better connections to make these investments for you, you will need to be both an accredited investor and a qualified client. To be an accredited investor, you must either (1) have individual net worth (or joint net worth with your spouse) of at least $1 million, excluding your primary residence, or (2) have had an individual income in excess of $200,000 in each of the two most recent years or joint income with your spouse in excess of $300,000 in each of those years and have a reasonable expectation of reaching the same income level in the current year. To be a qualified client, you (or you and your spouse jointly) must have a net worth of more than $2,000,000, again excluding your primary residence.
A lot of very rich people seem to use the London property market as a place to park funds. That’s all legit and above board of course, and to suggest otherwise is very wrong.
I notice index funds have been mentioned here a few times (not as a vehicle for the wealthy, but as a vehicle for the rest of us). I have noticed a number of articles lately that say that the growing popularity of these funds have led to an inflation in the prices of stocks included in those indexes. Hereis one such article from the NYTimes. Basically this means that some sort of reckoning is on the horizon. I have no idea what form that reckoning will take, or even, in fact, if it will come.
I used to tell everyone who cared about my unprofessional opinion that index funds were the place to go. Now I just keep my mouth shut.
Just a data point out there…
At least half of the truly wealthy people I know - some of whom I manage their assets - do use bonds. Older folks who are in the $5MM and greater range just don’t want to worry about it. So they buy bonds to just get past the whole ‘managing money for growth’ concept.
Currently - as of COB Friday - I can find taxable bonds running up near 8% and non-taxable bonds anywhere from 3.5-5%. Many people are content with that and use them - inside a trust - to both handle their money and leave it to heirs.
The second most popular option is dividend paying stocks. Buy them and hold them for 30 years or more and stand back. Collect the dividend - Chevron is above 6% and AT&T is above 5% - and watch them appreciate.
Private equity firms do exist, and I have a client or two who has money in some, but such are nowhere near a dominant investment. Those tend to chase people for whom the acceptable minimum is in the tens and hundreds of millions. There’s just not that many out there who want to play that game.
ALL of the truly wealthy people I know - here in Charleston though I know some others around the world - generated their wealth through business ownership of some sort. Department stores, chain businesses and so forth. It’s a ticket to the big time if it works. I know no one who generated their wealth through playing the market. The market becomes a place to stash their money after they’ve made it big.
One guy - the department store owner I mentioned up there - showed me his portfolio on Tuesday. He holds over 8,000,000 shares of individual stocks including being the majority shareholder - without a board seat! - in a regional bank.
Stocks can also be an effective means of generational transfer. Cost basis resets upon transfer on death. Buy $100,000 worth of XYZ, hold for 30 years and it appreciates to $10,000,000. If the holder sells it he can be on the hook for up to 15% of 9,900,000 worth of cap gains. But if he dies and his son sells it there’ll be no capital gains taxes - or a negligible amount depending on how quickly it sells.
SEC finally adopted rules for equity crowdfunding under Title III of the JOBS act. Jumpstart Our Business Startups Act - Wikipedia
“The limits are $2,000 or 5% (whichever is greater) for people earning (or worth) up to $100,000, and $10,000 or 10% (whichever is less) for people earning (or worth) $100,000 or more.” The rules and protections are different than for the accredited investing described above.
The rules are in place, but I haven’t looked into whether this method is practically accessible yet.
The Title III rules come into force in a few months. I work for one of the few companies that’s in the equity crowdfunding sector and Title III is going to make things very, very interesting for us.
The truly wealthy invest in politicians.
Interesting. The Walton’s have routine ways to avoid estate taxes, but the scheme at the link is somewhat different.
The Waltons fund programs like Crystal Bridges Museum of American Art – it does have a charitbale purpose since it allows ordinary citizens to view the Waltons’ art. But, though the details are complicated, the Waltons get the benefit of the arts’ appreciation … tax-free. (The scheme is named “Jackie O trust” after a famous woman whose tax lawyer dreamt up the scheme.)
The correct answer to the OP is they don’t… they hire a guy who does it as a full time job to do it for them.