As the stock market continues its tumultuous trajectory, the ultra-wealthy are making dramatic shifts in their investment strategies.
High net worth and ultra-high net worth individuals are holding historic levels of cash while retreating from stocks, according to new data.
Instead, the super-rich are plowing their wealth into alternatives like real estate, fine art, and private equity in search of better returns and protection against volatility.
Cash Is King
High net worth individuals — defined as those with $1 million or more in investable assets — held over 34% of their portfolios in cash as of January 2023, according to consulting firm Capgemini. That’s the highest allocation to cash since at least 2002. Meanwhile, their stock exposure has plummeted to just 23% of their total net assets — the lowest in 21 years.
Billionaires and ultra-high-net worth individuals are exhibiting similar behavior. Warren Buffett’s Berkshire Hathaway added $2 billion to its cash reserves in Q1 2023, bringing its total cash pile to a staggering $130 billion. This buildup of “dry powder” points to apprehension about the future prospects of stocks and the economy at large.
With inflation raging and the Fed aggressively hiking interest rates, cash and cash equivalents like short-term government bonds can generate better risk-adjusted returns than in the past.
Today, a two-year U.S. Treasury note yields around 5.0% — not too shabby in today’s low-rate environment. Stocks, on the other hand, look far less attractive considering their volatility and uncertain outlook.
The ultra-wealthy are clearly losing confidence in the stock market’s ability to deliver solid returns, leading them to seek shelter in the safe haven of cash. Their exit may serve as an ominous indicator for retail investors as well.
Fleeing to Alternatives
While parking their money in cash, the rich are also diversifying into alternative assets like real estate, fine art, and private equity. These complex and exclusive investments generally deliver higher returns than traditional stocks and bonds. They also provide greater protection against inflation, since their values often rise with consumer prices.
According to a new report from First National Realty Partners, periods of market turbulence can create attractive real estate investment opportunities. During downturns, high-quality properties can be acquired at a discount, and there is less competition from other investors.
Platforms like FNRP offer accredited investors access to institutional-quality, grocery-anchored commercial real estate without the legwork of finding deals independently. Since grocery stores provide essential goods, they tend to perform well even during recessions. For wealthholders, real estate represents a smart inflation hedge.
Art is another alternative gaining favor among the ultra-rich. With platforms like Masterworks, investors can buy shares in iconic paintings, allowing the regular Joe to own a slice of a Banksy. Fine art has a low correlation to stocks, helping diversify portfolios. As a physical asset, it also provides an inflation buffer.
While average investors don’t enjoy the same access to alts like private equity, the democratization of real estate and art investing now allows Main Street to emulate Wall Street. Retail investors would be wise to consider following the smart money into these alternative assets.
What’s Left for the Rest of Us?
For regular investors lacking the means to access exclusive alternatives, attractive opportunities still exist. Corporate bonds, which have been unpopular for years, are making a comeback as investors seek safe returns. Top-rated corporate debt currently yields around 4.8% — a significant premium to Treasuries.
Bonds are experiencing a renaissance as investors pivot to fixed income amid stock market chaos. High-quality bonds can provide steady income while acting as a stabilizer against volatility.
While the ultra-wealthy shift their billions into obscure corners like private credit, average investors can still construct resilient portfolios using instruments like investment-grade bonds. Though not as flashy as private equity, bonds offer Joe Sixpack an easy way to stay invested while avoiding excessive risk.
The stock market exodus among the super-rich could be a red flag for retail investors. Luckily, growing alternatives like real estate platforms and bond funds have opened the door for ordinary Americans to mimic sophisticated strategies once reserved for the ultra-wealthy. Savvy investors should strongly consider following the smart money and exploring these new options.