As any investor knows, volatility is a part of life. If you invest long enough, there’s no way to avoid the standard economic cycles and geopolitical uncertainty that can cause equities to whipsaw up and down. With that said, most experienced investors know that the way to protect your money during these cycles is through diversification. The more asset types you invest in, the less likely it is that all of them will decrease in value at once.
Everyone knows some of the standard asset classes for diversification: bonds, stocks, cash, and so forth. While these are all excellent, there are two additional alternative investment types that high net worth individuals should consider.
Private Equity Firms
If you have enough money to be an accredited investor (over $1 million in assets or earning over $200k single/$300 married), you should consider diversifying with investments through a private equity firm. These institutions invest in businesses and real estate opportunities not available to the general public.Â
For example, a private equity company might identify an enterprise with breakthrough technology but can’t conquer the market due to a cash flow issue. They might provide the business with the necessary capital to put them in a stable position to succeed in their niche. Of course, once the company becomes profitable, the private equity firm will exit it, giving investors a healthy profit.
Another typical private equity scenario is a leveraged buyout. In this scenario, the firm buys a company using debt financing against the target’s assets and operations. By putting up minimal investor money, the investment company can maximize its returns using leverage.
Real Estate
Real estate is another alternative investment to consider. It’s a fantastic hedge against a broader slump in the equity markets. Now, many people remember the pain of 2008 when prices plummeted. However, during the past five recessions, home prices have only fallen during two of them. Once was the Great Recession, which knocked prices down by 13.9%. The other was the recession between July 1990 and March 1991, when prices went down by just 0.9%! During the other three recessions, home prices went up an average of 3.7%.
The Great Recession was indeed an anomaly. If you want to protect yourself against broader slumps (like this COVID-related one, where property prices continue to advance upward), you’ll want to add some real estate to your portfolio. You can do that either via a stock, private equity investment, or buy it yourself!
Diversification Is Key
No matter what happens, diversification is essential to building and maintaining wealth. Without it, you could run an unnecessary risk of losing more than you should during the next downturn. Plan ahead, and please speak with me at M&A Wealth for additional alternative investment ideas and strategies!
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