What Do the Wealthy Invest In Besides Stocks and Bonds?

Wealthy individuals often invest beyond traditional stocks and bonds. These alternative investments typically have higher entry barriers, reduced liquidity, and unique characteristics compared to publicly traded securities. They aim for long-term capital appreciation or stable income streams, often requiring substantial capital commitments and a longer investment horizon.

Private Market Investments

Private market investments involve direct stakes in companies or funds not publicly traded, offering growth opportunities unavailable to general investors. Private equity involves acquiring ownership in private companies or taking public companies private. Managers often work directly with portfolio companies to improve operations and financial performance. These investments frequently include leveraged buyouts, growth equity for expansion, or distressed investing to restructure struggling companies. The average holding period for private equity buyouts has lengthened to 5.7 to 7.1 years, reflecting a longer-term commitment.

Venture capital targets startups and early-stage companies with high growth potential. Funding progresses through stages like pre-seed, seed, and Series A, B, and C rounds, with each stage indicating increasing company maturity and lower investor risk. Venture capital firms pool investor capital to fund these nascent businesses, taking equity stakes. Unlike private equity, venture capital focuses on nascent companies, often with unproven business models, aiming for substantial returns upon a successful exit like an acquisition or initial public offering.

Private debt involves direct loans to companies, offering an alternative to traditional bank lending or public bond markets. This segment has grown substantially, providing investors with higher yields and custom deal structures. These privately negotiated loans often go to middle-market companies, typically with annual revenues between $10 million and $1 billion, which may struggle to access conventional capital. Private debt includes senior secured loans, mezzanine debt, and unitranche debt, often with floating interest rates that protect lenders in rising rate environments. These investments are illiquid due to their direct and customized nature.

Real Estate and Infrastructure

Wealthy individuals invest in real estate beyond residential properties, including direct ownership or stakes in commercial assets like office buildings, retail centers, industrial properties, and multi-family complexes. Investors benefit from depreciation, a non-cash expense reducing taxable income by deducting a portion of the property’s cost annually. Residential rental properties are depreciated over 27.5 years, and commercial properties over 39 years.

Specialized real estate funds offer exposure to niche sectors like data centers, logistics hubs, or senior living facilities, diversifying real estate portfolios. These funds enable investors to target specific market trends. When selling an investment property, capital gains taxes and depreciation recapture can be deferred through a 1031 exchange, also known as a like-kind exchange. Internal Revenue Code Section 1031 allows investors to reinvest sale proceeds into another like-kind property of equal or greater value, deferring tax liability. The replacement property must be identified within 45 days and acquired within 180 days of the original property’s sale.

Infrastructure investments include essential public services and facilities like toll roads, airports, utilities, and communication networks. These assets generate long-term, stable cash flows due to their monopolistic nature and fundamental economic role. Investors are drawn to infrastructure for its defensive qualities, providing consistent returns less sensitive to economic cycles. These investments can also hedge against inflation, as revenues are often linked to inflation or adjusted for rising costs.

Hedge Funds and Specialized Strategies

Hedge funds are privately managed investment funds that use diverse, complex strategies to generate absolute returns regardless of market movements. These funds are accessible only to “accredited investors” who meet specific income or net worth criteria set by the U.S. Securities and Exchange Commission (SEC). To qualify, an individual needs an annual income exceeding $200,000 ($300,000 jointly with a spouse) for the past two years, or a net worth over $1 million, excluding their primary residence. Hedge funds utilize strategies like long/short equity, global macro, event-driven, and relative value arbitrage, often employing leverage and derivatives.

Hedge fund fees traditionally follow a “2 and 20” model: a 2% annual management fee on assets under management and a 20% performance fee on profits. These fees are higher than conventional funds, reflecting specialized management and potential for higher returns. Structured products are customized financial instruments combining traditional assets, like bonds, with derivatives. They are tailored to specific risk-return objectives, offering features such as principal protection, yield enhancement, or exposure to specific market movements, often with a defined maturity period.

Commodities, including physical goods like oil or agricultural products, are another investment. Investors gain exposure directly or indirectly, using commodities as an inflation hedge or for portfolio diversification.

Tangible Assets and Collectibles

Tangible assets and collectibles are non-traditional investments that can appreciate in value. These include fine art, rare wines, classic cars, stamps, coins, and other high-value items. These assets are often illiquid, requiring specialized knowledge for acquisition, valuation, and sale.

When sold for a profit, collectibles are subject to specific tax rules. Long-term capital gains from collectibles held over one year are taxed at a maximum federal rate of 28%, higher than standard long-term capital gains rates for other assets. If sold within one year, profit is a short-term capital gain, taxed at the individual’s ordinary income tax rate. A 3.8% net investment income tax may also apply, depending on the taxpayer’s adjusted gross income.

Precious metals, such as gold, silver, platinum, and palladium, are often held as a store of value or a hedge against economic volatility. While physical bullion can be held, investors may also gain exposure through specialized exchange-traded funds (ETFs) that track metal prices. These metals are considered tangible assets due to their physical nature and can offer diversification benefits as their performance does not always correlate with stocks and bonds. Their prices tend to move independently of traditional asset classes, offering a potential buffer against market downturns.