6 Investments That Are Worth It Only for the Wealthy
Written by
John Csiszar
Edited by
Gary Dudak
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Theoretically, all investors have equal access to the markets, However, the truth is that some investments are either price-prohibitive for smaller investors or simply not appropriate for their risk and experience levels.
Wealthy investors, on the other hand, not only have the capital to buy certain types of investments, but they may benefit from the diversification these alternative types of investments offer to a portfolio already well-stocked with more traditional options like stocks and bonds. Here’s a list of some investments that are generally only suitable for the wealthy, thanks to both the capital required to own them and the unique risk/reward profiles they offer.
Fine Art Pieces
Although there are some crowdfunding platforms that now allow smaller investors to own a share of fine art, if you want to pick up your own personal Monet or Picasso, you’re going to need extremely deep pockets.
Fine art doesn’t only require a large amount of capital to buy, it also doesn’t pay dividends and can’t be bought or sold on an exchange, like stocks can. That makes fine art not only hard to value but also extremely illiquid. It also takes the eye of an expert to pick art that will appreciate the most. All of these factors make individual fine art pieces investments that are generally better suited to the wealthy.
Commercial Property Developments
Commercial property developments are another type of investment that requires a huge capital outlay. Even if investors don’t fork over all of the money themselves, they have to qualify for huge loans, which only high net worth investors can get.
In addition to being expensive, commercial real estate is also complicated. Along with understanding general market conditions — and the ability of tenants to generate sufficient revenue — investors must either spend a great deal of time managing their commercial property or find and hire experienced property managers. Most of these factors put commercial property out of reach for smaller investors.
Apartment Buildings
Apartment buildings are probably better suited to the average investor than commercial real estate projects are, but they share many of the same characteristics that make them out of reach for most. Apartment buildings also require a significant amount of capital and carry ongoing responsibilities that may overwhelm novices, and they can be illiquid as well.
From filing the right permits to getting all the apartments filled, collecting rent, managing disputes, taking the appropriate tax deductions, keeping up with maintenance and carrying sufficient insurance, managing apartment buildings can be a full-time job. Although you can hire property managers, that will take additional money and will also distance you from how your investment is actually performing on a day-to-day basis.
Private Equity and Hedge Funds
Private equity and hedge funds are two types of investments that are usually only available to either so-called “accredited” investors or private purchasers. Accredited investors, as defined by SEC regulations, are those with $1 million in net assets and an income of at least $200,000 over the past two years. Qualified purchasers are those with at least $5 million in investments.
Private equity allows investors to directly purchase shares in private companies. Hedge funds are somewhat like mutual funds, except they employ more aggressive and advanced investment strategies such as derivatives, options and the use of leverage. For these reasons, smaller investors are shut out from these types of investments, as securities regulators deem them inappropriate and prevent them from participating.
Limited Partnerships
There are some limited partnerships that are available for smaller investors, but they generally aren’t worth the time, effort and restrictions. Partnerships have complex tax ramifications, and they are often illiquid.
Some wealthy investors use partnerships as tax shelters or to gain access to businesses that are better-suited for this type of corporate structure, such as oil and gas ventures. As partnerships can’t be traded on an exchange and investors generally have limited visibility as to how they are being operated, they are generally in the domain of wealthy investors who have knowledge of the space.
Luxury Watches and Cars
The rarest and most beautiful luxury goods in the world may cost hundreds of thousands of dollars each to own. The price tag alone is enough to push these investments into the realm of the wealthy. But given the fact that these types of items are hard to value and have illiquid markets, making them potentially hard to sell at a desired price, they may not be appropriate for smaller investors either.
Wealthy investors have the luxury of time to wait for the price they want on these types of items, but smaller investors might require a more predictable, quicker return on their money.
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