Did Forbes swing and miss on investing like the uber-rich?

I have always been fascinated by how the world’s wealthiest individuals invest and what we can learn from them.

Recently, I flipped through some articles I’ve had filed away on the investing choices of the uber-wealthy. I found a Forbes story about how the richest people in the world have shifted their allocations. I read the piece again today. All I can say is this: Forbes missed one.

The advent of crowdfunding gives individual accredited investors access to deals once limited to the world's financial elite.

The advent of crowdfunding gives individual accredited investors access to deals once limited to the world’s financial elite.

It’s not a bad piece, or even inaccurate. It’s just missing a key piece of information about how we can invest like the wealthy.

It’s no secret the world’s elite invest differently than up-and-comers still working to get there. For starters (and I talk about this a lot), they invest much less in stocks and much more in hard assets like real estate and private equity. Forbes suggests that any investor looking to emulate the wealthy can shift more dollars to private equity, via stock in the largest PE firms, purchasing shares in a PE fund itself or working with an advisor who specializes in private investments.

Those three methods carry their own sets of challenges. For example, allocating more dollars to publicly traded private-equity stock doesn’t eliminate the volatility many wish to avoid in the market. As for investing directly in funds or with specialized advisors, those routes come with minimum investments that can price many investors out of the opportunity.

So what’s an accredited investor to do?

Here’s what Forbes missed: These changing allocations towards more exposure to private equity represent the wealthy making direct investments with partners they trust. The only secret sauce is that private equity offers exclusive, high-growth opportunities that are typically correlated with the success and failure of a business (ownership), and less dependent on the greater market performance.

Here’s why I get excited: Ten years ago those options available to the wealthy weren’t available to the rest of us. Even two or three years ago, most accredited investors didn’t have ready access to investments in hard assets through a relationship with a proven sponsor. Now they are accessible.

Crowdfunding and online solicitation changed the game. The investing world is becoming flat. Now, it’s possible for the average accredited investor to put their money into pools that support proven, trustworthy partners in real estate and operating companies. Allocations don’t have to be limited to a big publicly traded REIT or PE firm. Today, seasoned pros are putting technology to work and creating platforms that open trusted investing partnerships to a much wider segment.

Here’s where Forbes and I agree. The wealthiest investors in the world don’t allocate much to “buy, hope and pray mutual funds.” Instead, they pick investments with trusted partners that won’t be subject to stock market ups and down. For the first time in history, that advantage is now available to the rest of us.

Nikki VascoBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

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“Unlike previous reports and previous cycles, we are seeing sustained growth,” said Mitch Roschelle, PwC U.S. real estate advisory practice leader. “In the past several years, we reported that real estate market participants’ main fears revolved around uncertainty with the economy. Now, the trepidation in their eyes has more to do with the ability of the growing real estate markets to adapt to a series of megatrends impacting society and the global economy.”

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1. The 18-hour city comes of age. 

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2. The changing age game. 

Over the last several years, we have watched Millennials postpone homeownership and rent longer, but this could change in the 2020s. The commercial real estate industry should also expect to see changes as a result of a smaller population of rising Generation Z, and Baby Boomers that will continue to influence real estate development and investment for at least two more decades.

3. Labor markets are heading for a tipping point. 

Economists believe that while the “jobless recovery” is a concern, long-term labor market trends are heading in the opposite direction. In a few years, the major concern will be about labor shortages, not surpluses. Based on responses from survey participants, the most important issue for real estate is job growth.

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5. Event risk is here to stay.

Geopolitical risks, global unrest and natural disasters are event risks that are particularly troubling to U.S. commercial real estate investors. Consequently, many of the survey respondents identified international investors as their best prospects for increasing volume in 2015.

6. A Darwinian market keeps the squeeze on companies.

Competition is unrelenting, and the need to have a clear “brand identity” is important as firms navigate the swift stream of capital. It will be important for companies to specialize and sharpen their focus. According to some survey respondents, this is a sign of maturity in the industry and greater stability ahead.

7. A new 900-pound gorilla. 

The Defined Contribution Real Estate Council was established in 2014 to “promote the inclusion of direct investments in commercial real estate and real estate securities within defined contribution plans in order to improve participant outcomes.” In 2014, U.S. retirement assets hit $23 trillion, and more than half of that was in defined contribution or individual retirement account funds. It’s likely that new products will be specifically directed toward this capital source in the coming years.

8. Infrastructure: Time for the U.S. to get serious?

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9. Housing steps off the roller coaster.

Many economists believed that the residential real estate market was “too big to fail,” but collapse it did. Fortunately, residential real estate appears to be returning to the classic principles of supply and demand. As a result, residential real estate should be a positive trend for the economy as a whole.

10. Keep an eye on the bubble.

While respondents of the survey generally had a positive outlook, many cautioned that up-cycles breed optimism. Unfortunately, excessive optimism can promote recklessness, which is why some survey respondents questioned if equity underwriting will be less rigorous in 2015 than in 2014.

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