Don’t Count Out Small-Caps

The Assets You Never Bought (But Really Should)

Have you ever wondered how the super wealthy invest their money? 

They must do things differently than the Average Joe, right? 

That’s correct.

A recent study performed by JP Morgan Asset Management caught my eye this week. It clearly shows that the super-rich behave differently than most investors.

So, what sets them apart?

There’s one particular asset class that they take advantage of that most investors ignore.

They use this asset class to not only protect their wealth, but to grow it (regardless of what the broader market is doing).

If that sounds too good to be true, it’s not.

The reason that the uber-wealthy take advantage of this strategy is because it’s largely uncorrelated to the traditional stock and bond markets.

And the good news is, anyone can pursue this strategy.

It doesn’t require billions of dollars to do so. You don’t even need millions.

If You Can’t Beat Them, Join Them

I’m talking about alternative assets. 

In the past this might have been difficult for the average investor. But today, it’s easy. And I can prove it.

An alternative investment is a financial asset that does not fall into the traditional categories of stocks, bonds, or cash. 

Common examples are real estate, private equity investments, venture capital, managed futures, other forms of derivatives (options contracts), commodities and precious metals, art, antiques, and other collectibles.

To be clear here, I’m not talking about a Paul Skenes rookie card… I’m talking about a high-grade 1952 Topps Mickey Mantle.

I’m talking about assets that are truly rare and so feverishly sought after that their value is not tied to the stock market’s performance.

JP Morgan Asset Management recently published their 2024 Global Family Office Report. This study surveyed 190 single family office clients from across the world with an average family net worth of $1.4 billion.

And after reading over 97 pages of dry copy and charts, one thing was clear: These families get rich, and stay rich, because of alternative investments.

Owning assets like that is how these family offices are able to hit their double-digit annual return targets without taking excessive risks in the stock market.

According to the Family Office Report, alternative investments was the largest average holding of these portfolios with a 47.5% weighting (publicly traded stocks was the second largest at 26.3% average weighting).

What’s more, the data shows that alternative assets become a more and more important part of these portfolios the larger they get. 

• Portfolios valued between $50 and $500 million had a 43.89% average weighting towards alternatives. 
• Portfolios valued between $501 and $999 million had a 47.14% average weighting towards alternatives.
• Portfolios valued at $ 1 billion or more had a 47.31% average weighting towards alternatives.

In 2021 Vanguard published a study which looked at over 5 million investor accounts showing that the average portfolio allocation across its platform was 63% stocks, 16% bonds, and 21% cash. 

When compared to the JP Morgan report, this Vanguard data shows that there’s a big disconnect between the typical retail investor and the super-rich.

But it doesn’t have to be that way. 

Three Alternative Asset Strategies

Maybe you’ll never own a Monet or a Mickey Mantle rookie card. But investing in alternative assets – and reaping the benefits – is easier than you might think.

1. Real Estate:If you own your own house, congratulations. You own an alternative asset, whether you knew it or not. Private real estate is among the most common alternative assets found in the portfolios of family offices.

What about REITs (real estate investment trusts)? As longtime readers undoubtedly know, we’re big fans of REITs and their ability to generate reliable – and reliably rising – income for long-term investors.

REITs are not quite the same as owning your own portfolio of private real estate, and we’d hesitate to label them a pure alternative asset. But they are an easy “one click” option for real estate exposure. And we follow several top-tier REITs in the model portfolio of Intelligent Income Investor, paid up readers can view that here.

2. Options Strategies:The inclusion of options strategies to increase leverage, enhance returns, and to hedge potential losses in stock positions is also common.

The truth is most people should avoid sophisticated options trading. They assume it’s a quick way to blow up their portfolios. And, when used irresponsibly, that’s absolutely the case.

But options strategies in the hands of a mature investor can be a great tool and another way to add alternative asset exposure to your portfolio. Here, I’d recommend the research published by my colleague Stephen Hester.

Stephen runs our Intelligent Options Advisor service, and he’s been doing a great job. That service has recorded an 80%+ win rate since inception in November of 2022. Again, paid up subscribers can see Stephen’s full portfolio right here.

3. Private Investments and Private Credit:I know that most of you don’t have connections in Silicon Valley to make smart venture capital moves (neither do I, for what that’s worth). That’s OK.

Thankfully, there is a way to gain access to things like real estate, infrastructure assets, private equity and debt, and a slew of other alternative investments is one easy to buy/own package: alternative asset managers. 

We own several of these companies in our paid-up model portfolios.

For instance, Blackstone (BX) is the biggest and best-known player in this space with over $1 trillion in assets under management. 

Blackstone owns more than 230 companies and over 12,500 real estate assets. 

Many of the brightest minds in the industry work for Blackstone and the company has a long history of enriching shareholders.

BX shares are up by more than 29% during the past year, nearly 198% during the last five years, and by more than 301% during the last decade (all these results beat the S&P 500’s returns during the same periods). The company pays a 2.5% dividend and offers a five-year dividend growth rate of 9.1%.

At Wide Moat Research, we’re all about building portfolios that allow investors to sleep well at night and Blackstone is just one of several ideas that we like when it comes to adding diversification to our portfolios without adding undue stress or risk.