I'm a Financial Planner: Here's How to Invest Like the Wealthy, Even if You Don't Have Millions

Years ago, when clients asked me about private market investments, I had a standard response: "Sure, as long as you have at least $20 million in assets."

Since most private investments required minimum assets of $500,000 to $1 million, I didn't recommend putting more than a small percentage of someone's portfolio into illiquid investments. Investors needed a sizable portfolio to get involved and keep themselves liquid.

Today, that conversation has changed completely. What was once the exclusive domain of university endowments such as Harvard and Yale and the ultra-wealthy, has become available to a much broader range of investors. It's about to get even more accessible.

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Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

Now the question isn't whether you qualify, but whether private markets make sense for your financial goals.

What are private investments?

Private market investments refer to assets that aren't traded on public stock exchanges. These include investments you're familiar with, such as equity, credit or real estate. But they don't trade publicly.

Increasingly, companies are choosing to access private capital to avoid the regulatory burdens and short-term earnings pressures of public markets.

Staying private allows them to make longer-term strategic decisions and access "patient capital" from investors who understand their long-term goals and growth trajectory.

Twenty years ago, there were 7,000 public companies in the U.S. Today, the number is about half that. People joke that the public markets have shrunk so much that the Wilshire 5000 should probably be renamed (that once broad market index has just 3,400 stocks).

If you want exposure to the full market, especially high-growth early-stage companies, you can't ignore private markets.

Institutions have long recognized this market shift. That's why they allocate 25% of their portfolios to private markets vs less than 5% for individual investors.

The latter are missing out: Private markets have consistently outperformed publicly traded companies, have lower correlation with other assets for better diversification and give investors access to innovative companies and sectors.

Private markets are becoming more accessible

In recent years, regulatory changes have opened the private market doors to a wider range of investors.

Previously, you had to be an accredited investor to participate. The SEC defined accredited investors as individuals with at least $1 million in net worth (excluding their primary residence) or an annual income of $200,000 for the past two years (or $300,000 for married couples).

In 2020, the SEC expanded eligibility. While the original financial thresholds remain the same, now there are alternative ways to qualify as an accredited investor, including holding professional qualifications such as a Series 7 license.

Recently, the SEC has also removed the accredited investor requirement entirely for several private market interval funds, continuing to broaden the target audience for private markets.

Four ways private market opportunities have changed

Just as important as the rule changes are the advances in how private market opportunities are packaged and delivered to individual investors.

In the past, participation usually meant making a large, direct investment in a single private deal and taking on the due diligence yourself.

Today, investment management firms build diversified model portfolios that include a private market "sleeve" — often 10% to 20% of the allocation — alongside traditional public-market holdings.

These firms vet and select the underlying managers, spreading exposure across multiple private equity, private credit and other strategies instead of concentrating in a single company or fund.

These innovations have dramatically lowered the practical barriers to participation, fundamentally democratizing an asset class that was historically the exclusive domain of institutional investors and the ultra-wealthy.

Lower minimums. New investment vehicles have brought minimums down to $10,000 (even $1,000 in some cases).

These funds pool money from many smaller investors to meet the large minimums required by the underlying private investments. Minimums will likely come down even more in the coming years as more companies clear regulatory hurdles.

Semi-liquid solutions. Instead of locking up your money for seven to 10 years as with traditional private-equity investments, some new structures such as interval funds offer quarterly or semi-annual liquidity windows in which you can withdraw your money.

You still can't trade these investments daily as you can a stock, but you're not completely locked up for years, either.

Tax-efficiency. In some models, the illiquid private market portion is combined with tax-loss harvesting and other portfolio-level strategies in the liquid portion, creating a more tax-efficient overall investment.

Access through retirement plans. Perhaps most important, private markets could soon be coming to your retirement plan in a big way.

President Donald Trump recently signed an executive order directing the Labor Department to re-examine guidance on incorporating alternative investments into retirement plans.

There's already movement. Empower, a 401(k) administrator serving 19 million accounts, has announced plans to introduce private market investments in its plans in the next three to five years once it works through the hurdles.

These investments will likely first appear in target-date funds, where professional managers can balance higher-cost private assets with lower-cost index funds, while maintaining appropriate diversification for retirement savers.

What you need to know before investing

While private markets offer compelling opportunities, they come with some important features that differ from traditional investments.

Liquidity. This is probably the biggest factor to which to pay attention. Unlike stocks or bonds that you can sell at any time, private market investments typically require holding periods of five to 10 years.

When a business needs a $10 million loan and chooses to bypass traditional banks, they're usually working on multiyear projects. You're essentially committing your capital for the duration.

This is why I recommend limiting private-market exposure to just 10% to 20% of your total portfolio. You need to be absolutely sure that you won't need access to this portion of your assets during the investment period.

Tax complexity. You're probably familiar with receiving a Form 1099 for your investment accounts to report on your taxes. You typically receive these at the beginning of the year.

While some private investments issue traditional 1099 forms that arrive before the April 15 deadline, others issue K-1 tax documents. Those, typically, don't arrive until summer.

If you receive K-1s, you'll need to file a tax extension, and you won't be able to complete your return until October 15. You still must pay any taxes owed by April 15 (requiring you to estimate).

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In my experience, many investors find this manageable after they've done it once. But if maintaining the April 15 tax filing deadline is important to you, focus on private market options that issue 1099s rather than K-1s.

Due diligence. With reduced regulatory oversight compared with public companies, the due diligence process is even more important.

This is where working with established investment firms that specialize in private markets can be invaluable. These firms conduct the research and vetting that would be nearly impossible for individual investors to do.

Apply the same basic principles of sound investing as you always would: Look for financially strong companies with solid growth records and clear business models.

Private markets, while attractive, aren't magic. They come with unique risks, lockup periods and tax wrinkles.

For investors who can commit a slice of their portfolios for the long haul, they offer something rare: The potential for stronger returns with less volatility. That combination has long been the territory of billion-dollar endowments.

Now, it could be part of your portfolio, too.

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