How To Invest Like A 1 Percenter

Having wealth allows investors to create more wealth — wealthy people have more capital to invest, and historically, they have had unique access to some of the best investment opportunities. 

But the advent of online investing platforms across multiple areas such as real estate and equity crowdfunding and the loosening of some federal laws regarding who can invest in what has cleared the way for everyday investors to get involved in areas that were previously closed to them. With that in mind, Benzinga takes a look at the investing habits of the top 1% and how you can mimic that approach to build an impressive portfolio of your own. 

Diversification

Everyone has heard the age-old warning against putting too many eggs in one investment basket. The logic is simple. In investment parlance, risk is known as exposure, and if you have too much money invested in one particular area, you — and your investment capital — are exposed to the risk of loss in the event there is a downturn in your investment. This is why the 1% — or any successful investor — has always seen the value in having a diversified portfolio. 

By diversifying, the ultrawealthy give their money more opportunities to grow and protect themselves against severe market downturns in any one area. For example, if you held nothing but stock in America’s largest companies the day before the Great Depression, you were doing pretty well. 

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But you'd have been out on the street by the following afternoon. Largely as a result of major market corrections like the Great Depression, the wealthy have developed ways of hedging their investments

To that end, a diversification strategy is one of the key aspects of investing like a 1 percenter. Knight Frank's "Wealth Report" offers valuable clues about how the top 1% go about building their portfolios. 

Traditional Investments

Stocks — also known as securities — and bonds are classified as traditional investments. They have long been the bedrock of many successful investment portfolios. Securities allow investors to buy small equity shares in publicly traded companies, which (hopefully) they can earn dividends from or sell for a profit in the future.

Issuing bonds is one of the preferred methods of fundraising for municipal, state and national governments. Instead of borrowing money from banks, they issue bonds that pay investors a percentage of their original investment, known as a yield, over an extended period of time. Some companies also issue bonds to raise funds instead of issuing more stock or borrowing. Most bonds must be held for years before investors reap large profits.

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The advantage of securities is that there is no cap on their value, and any stock has the potential of making an investor wealthy in one day's trading. Another advantage of securities is there is no accreditation requirement, meaning anyone can buy a stock if they can afford it. On the downside, securities can be volatile, and depending on market conditions, their value can take precipitous declines without warning. 

For an example of this, look no further than the instability regarding bank stocks in early March. Stockholders in banks have been on a roller coaster since the Federal Deposit Insurance Corp.'s takeover of Silicon Valley Bank. The news was so dire for some bank stocks that trading on them was temporarily halted because some of them plunged as much as 75% overnight. 

Bond trading, on the other hand, has traditionally offered more stability because it's much less likely that entire cities, states or countries will go bankrupt than one company. The tradeoff from the increased security is that bond yields are typically fixed for a period of time until they reach their maturity date, at which point the bondholder makes their profit. This means bondholders grow their money slower. 

When it comes to traditional investments, investors diversify by holding a mix of stocks across multiple sectors and municipal bonds. Some investors diversify their entire portfolios with a mix of securities and bonds. The risk of larger contagions spreading in the stock market still exists, but the Knight Frank study shows that, on average, the world's top 1% have roughly 26% of their portfolio in stocks and another 17% invested in bonds. 

Commercial Real Estate

Land ownership has been a cornerstone of wealth building almost since the beginning of recorded history. The wealthiest members of nearly any culture had significant land holdings, which allow investors to make money without having to sell their assets. 

Perhaps the best example of this principle is commercial real estate, something almost everyone in the world depends on in some way. By some estimates, almost 70% of the population in major American cities rent apartments instead of buying homes. The same thing holds true of most commercial businesses, which rent the space they occupy rather than owning it. 

Examples of commercial real estate investments include:

• Multifamily residential properties
• Commercial properties such as shopping malls, office buildings and strip centers
• Industrial properties like factories and foundries
• Storage facilities
• Parking lots
• Stadiums 
• Hospitals and medical centers

As you can see, commercial real estate touches the lives of almost everyone in society. Even people who own their own homes likely go to work in a rented commercial facility or purchase their goods and services from a business that rents space. 

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Owning commercial real estate allows investors to earn passive income through rents collected without having to sell the asset or actively manage it, an expense usually contracted to a third party. As the rents go up, their income increase as does the value of the property. 

If they sell the asset after several years of ownership and rent increases, it will be at a profit on the original purchase price. Because it's a necessity, commercial real estate has the potential to perform for investors independently of what's happening in the stock market. 

This isn't to say that a down stock market won't affect commercial real estate prices, but it's almost unheard of for a commercial property to lose all — or even most — of its value overnight the way stocks might. Even in down economic periods, commercial real estate may underperform by not appreciating as quickly as it would in a hot market, but investors can usually expect reliable returns. 

When you add those advantages to the significant tax breaks owning commercial real estate offers, it's not hard to see why the asset makes up an average 34% of the top 1 percent's investment portfolios. Of that 34%, roughly 21% is invested in commercial real estate, while the other 13% is in real estate investment trusts (REITs).

Where To Find Deals

Public REITS: REITs are public corporations that own and operate commercial real estate assets. Their shares are available on public stock exchanges and in a variety of subsectors. There are three basic types of REITs:

• Equity REITs own and operate commercial real estate. Shareholders receive a percentage of the rents until the asset is sold, when they receive the profits realized after appreciation.
• Debt REITs borrow large sums of money at low-interest rates and then lend that money to other real estate investors or developers who need capital. They may also purchase large tranches of debt securities. Debt REIT investors make money off the difference between the interest rates they charge borrowers and the interest rates the REIT pays on the capital it borrowed. 
• Hybrid REITs contain both equity and debt assets.

A licensed broker or online stock trading platform can help you buy shares of public REITs. 

Private REITs: Private REITs operate a lot like public REITs, but their shares are not available on public exchanges. They still pay investors revenue through rents, interest or both, but the difference is the lack of a secondary market where shares can be sold. Many private REIT offerings have hold periods that require investors to hold on to their shares for a set time period, usually three to seven years, while the investment stabilizes.

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Historically, private REIT investments have been limited to accredited investors because they are so expensive. But federal regulations now allow nonaccredited investors to participate in commercial offerings through real estate syndication deals and online real estate investing platforms.

Many of these platforms allow investors to participate in some Class A commercial and multifamily offerings just like the heavy hitters. One place to consider when looking for these deals is Fundrise, a well-respected online real estate investing platform that has many REIT offerings. Fundrise features a number of funds that nonaccredited investors can buy into for as little as $10. 

Fundrise also allows investors to scale upward through different offerings in the following investment categories:

• Starter: $10
• Basic: $1,000
• Core: $5,000
• Advanced: $50,000
• Premium: $100,000

Fundrise is operated by an experienced team of real estate professionals and their combined average return stacks up very competitively with some of the best public REITs.

Real Estate Syndication

In real estate syndication deals, investors combine large sums of capital to purchase equity in a real estate offering that has been made by a syndicator or deal sponsor. In most cases, the offering is a piece of high-value commercial real estate such as an apartment building, medical center or office building. 

Typically, the syndicator is an experienced real estate investor or group of investors who look for deals with upside and turn them over for a profit. This can involve buying a distressed asset and renovating it or building a new property from the ground up. The syndication aspect allows the deal sponsor to raise funds without borrowing money. Investors will usually become general partners in the offering while the syndicator acts as the managing partner. 

The number of shares investors purchase determines how much equity they have in the deal, but they do not have active voting privileges that allow them to make management decisions for the asset. Those are made by the managing partner. Like private REITs, real estate syndication deals have hold periods where shares can't be liquidated. If there is a secondary market or early liquidation option, it may come with a penalty. 

Generally, real estate syndication deals have buy-ins that are so high that investor accreditation is required to participate. But some of them accept contributions from self-directed individual retirement account holders. In either case, syndication deals are probably better suited for long-term investors. Investors interested in real estate syndication deals can find them on a number of platforms, including RealtyMogul and CrowdStreet.

Private Equity

Although the collapse of Silicon Valley Bank and news of layoffs at Alphabet Inc. and Meta Platforms Inc. have rattled the tech industry, the fact remains that investors can still make astronomical amounts of money through venture capital or private equity. In these deals, startups offer investors equity shares in their company at low prices. If the company should have a successful exit or go public, early investors can make generational wealth off just one deal.

That kind of upside is one of the main reasons the top 1% makes sure to dedicate a portion of their portfolio to private equity or venture capital. On average, they put about 9% of their investment portfolio in this basket. For most of its history, private equity offerings were the exclusive province of well-connected institutional investors like hedge funds or private investors, but that is no longer the case. 

The Jumpstart Our Small Businesses (JOBS) Act of 2012, allows nonaccredited investors to get in on the private equity party through equity crowdfunding. Now, nonaccredited investors can find equity crowdfunding offerings in a full range of business sectors on platforms like Wefunder and StartEngine.The upside in private equity, venture capital or equity crowdfunding offerings is tremendous, but the risk of loss of principle is comparatively high in relation to real estate. 

This is why the top 1% does not dedicate a majority — or even a large portion — of their portfolio to this sector. This is an area of investment that's best to dive into when the rest of your portfolio is fairly built out and generating solid returns — unless you have the stomach for high-risk/high-reward investing. 

Other Alternative Investments

The top 1% have a few other preferred investments they use to round out their portfolio. Precious metals such as gold, platinum and silver have long been highly sought after by investors. This is especially true during periods of high inflation. If you look at the price of precious metals through time, they almost always surge in value during periods of high inflation or stock market corrections. 

Some investors are so enamored with precious metals that they make up the majority of their portfolio, but this is not the case when it comes to the top 1%, which is averaging about 3 % of their holdings in gold. Gold and precious metals are available on several investment platforms, including Advantage Gold or Red Rock Secured. Investors can also buy gold through gold exchange-traded funds (ETFs) or mining stocks.

Another area where the top 1% are concentrating their investment dollars is niche alternative offerings such as art, wine and scotch. Masterpieces by Jean-Michel Basquiat or Leonardo da Vinci are selling for hundreds of millions of dollars. That kind of appreciation has allowed art investments to outpace inflation and surge in popularity. 

Classic cars and wines also are becoming popular investment options for the 1%, and in some cases, they have up to 5% of their portfolio invested in these passion pieces. Investors looking to get in on this action can do so through platforms like Vinovest or Masterworks. 

The Bottom Line

When you look at how the 1% invest, it's not hard to understand why they have so much success. Yes, they have the advantage of a large pot of money to play with, but the diversification strategy is something every investor can learn from. The risk of loss is always present, but by spreading that risk, they limit their chances of taking major losses over their entire portfolio at the same time.

Now that there are online platforms to invest in everything from wine and art to real estate, the regular investor has a better opportunity than ever to adopt the investing habits of the top 1%. 

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