For retail investors, the typical portfolio consists of a home mortgage
on a primary residence; indexed mutual funds held in retirement accounts;
cash or cash equivalents in a bank account; and maybe some
stock options.
This portfolio is far from ideal. First, the mortgage is overly exposed
to the specific risks involved with the property and local market
conditions. Second, the investment options are largely limited to financial
instruments issued by publicly listed companies, offering only indirect
benefits from growth in huge segments of the economy. Third, bank
accounts are yielding near-zero (or negative) returns.
High-net-worth investors have a much wider range of investment
options, including residential apartment buildings, commercial real
estate, illiquid assets, artwork, high-end collectibles, and private equity.
These lucrative options provide access to significant opportunities for
wealth creation in ways that are largely inaccessible to retail investors.
For example, real estate represents one of the most dynamic
segments of the global economy, and yet retail investors are limited
mostly to owning shares in listed companies that benefit indirectly from
property appreciation. Although retail investors may also buy shares in
real-estate investment trusts (REITs), these targeted investment vehicles
typically involve high set-up costs, high maintenance fees, and
limited choice in investment properties.
The reality is that investing in commercial real estate calls for
a level of financial commitment beyond the reach of all but the
wealthiest, high-net-worth investors. The same holds true for other
large-ticket alternative assets such as artwork, jewelry, or prestige
properties. The potential returns are massive, but those asset
classes have limited access to all but the wealthiest investors.
It doesn’t have to be that way.