It’s no secret that ultra-high-net-worth individuals (UHNWIs) allocate their portfolios differently than the average investor. While the average investor allocates a majority of their portfolios to public equities, UHNWIs allocate a majority of their portfolios to alternatives.
What Are Alternatives?
Alternative investments are financial assets that do not fall into traditional investment categories such as stocks and bonds.
Why Do UHNWIs Prefer Alternatives?
Alternatives offer the possibility of higher returns but with less volatility. Uncorrelated to Wall Street, certain alternatives generate better risk-adjusted returns than any public offerings.
What Types Of Alternatives Do the UHNWIs Prefer?
UHNWIs prefer private market alternatives with a particular interest in private companies (private equity) and real estate ownership. According to global investment firm KKR, UHNWIs allocate their portfolios within the alternative asset class as follows:
According to KKR, their UHNWI clients allocate a majority of their portfolios to alternatives, and within the alternative asset class, private equity takes priority, with real estate coming in second. Among all assets, KKR UHNWIs allocate 27% to private equity and 11% to real estate.
Another group of UHNWIs also place a premium on private equity and real estate in their asset allocations. Still, their priorities are flipped, with real estate taking first place among all assets.
So Why Real Estate And Private Equity?
Private passive investments in real estate and private equity offer many of the same benefits that UHNWI investors covet for building wealth. These include:
- Cash Flow.
- Appreciation.
- Tax Benefits.
- Diversification.
- Uncorrelated To Wall Street Volatility.
- Inflation Hedge.
So How Much Should You Allocate To Real Estate?
I believe that there’s no such thing as too much of a good thing. Passive real estate investing lends itself to multiple levels of diversification that investors covet for mitigating risk in their portfolios, including diversification across:
- Asset Segment.
- Stage Of Development.
- Security Type.
- Type of Return.
- Holding Period.
- Geographic Location.
If you want to play it safe and follow the allocations of the ultra-wealthy, an allocation to real estate in the 11%-30% range would be acceptable.
The reality is that the investors with more experience investing in real estate typically allocate higher percentages of their portfolios to real estate. Ultimately, how much you should allocate to real estate is up to you.
Starting at an 11% allocation with increases as you become more versed, knowledgeable, and experienced in the asset class would be a reasonable approach.
Whatever you decide, there’s no doubt that real estate is a valuable addition to any portfolio – as the investing success of UHNWIs demonstrates.
