The recent bull market has been minting thousands of new millionaires each week, opening doors for those investors to new opportunities — and risks.
Today, more than 16 million American households, nearly double the number from a decade ago, have passed an important milestone set by the Securities and Exchange Commission (SEC).
The securities regulator deems any investor, individually or with a spouse, with a net worth of $1 million (excluding their primary residence) an accredited investor.
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That means in addition to the stocks, bonds and funds that all investors can buy on public exchanges, the investor can also invest in certain private investments, including hedge funds, private equity, private credit and venture capital opportunities.
(You can also qualify as an accredited investor under other criteria, including income thresholds — a consistent annual income of at least $200,000 for a single person, or $300,000 for a married couple.)
The attraction of the expanded opportunities is fatter returns and improved diversification. Some private investments have outpaced the U.S. stock market over the past five years. But the risks are higher, too. These investments don’t trade on public exchanges, and they aren’t publicly marketed or sold. And unlike publicly traded companies and funds, they aren’t required to publish regular financial statements.
The SEC established the accredited investor threshold to protect investors with limited financial knowledge from risky ventures. So investors who meet the standard are considered financially sophisticated enough to assess the merits of an investment on their own. But even professional investors have been burned by private investments. That’s why wealth managers tell accredited investors to tread carefully.
“You now have access to more than the average Joe,” says Jonathan Lee, a U.S. Bank wealth management adviser. But “just because new opportunities are available does not mean they are suitable” for you, he adds.
Buyer beware. Accredited investor status is not an “open sesame” to all private investments. It’s just the first step up the SEC’s ladder.
More investing opportunities are unlocked for qualified clients, who have $1.1 million in assets with an adviser or a $2.2 million net worth (excluding a primary residence); qualified purchasers, with investment portfolios of at least $5 million, can access even more.
Whether you’re qualified or accredited, proceed cautiously if you buy into a private investment. Be skeptical of pitches from brokers seeking commissions, internet personalities or even friends. Though many private investments are available only to qualified investors, you may be offered a wider set of opportunities if you’re accredited and you work with an adviser.
Put in only what you can afford to lose — and certainly no more than 5% of your portfolio, says Prudence Zhu, a certified financial planner based in Phoenix. Be aware, too, that often the best deals are first pitched to investors who can fork over a seven-figure sum, Zhu says. Small investors tend to get offers the wealthy have passed on and thus may be riskier.
You may need to provide proof, in the form of account statements or tax returns, that you meet the SEC’s accredited investor bar before you invest. And it can be difficult or even impossible to cash out for many years. There may be hidden costs, too. Many private investments require that you fill out a Schedule K-1, which can complicate and raise the cost of preparing tax returns.
Private investments aim to boost your overall return or enhance diversity and smooth out the overall ride of your portfolio. But each comes with certain caveats.
Hedge funds. These aim to deliver positive returns in both bull and bear markets. The funds use a variety of tactics. Long-short strategies, for instance, buy stocks that are expected to rise in value and sell short stocks that are expected to fall in value.
Hedge funds tend to be less volatile than the stock market; the Credit Suisse Hedge Fund index held up better than the S&P 500 index in 2022. The trade-off is tepid returns. Over the past decade, the Credit Suisse index has returned 4.4% annualized.
Most opportunities are limited to qualified investors by SEC mandate and charge a 2% annual management fee plus 20% of any gains. In addition, some of the few private hedge funds available to accredited investors require $100,000 minimums.
Private credit. Private credit includes loans made to companies that can’t, or prefer not to, borrow from a bank. Since the start of 2019 through mid-2024, this asset class has returned 9% annualized, according to market data firm MSCI, beating the Bloomberg Aggregate Bond index, which gained 0.9%. But some private loans aren’t rated by credit agencies, adding a layer of risk. And they’re not easily traded, so you might have to wait until the loan matures to get your money back.
Many private credit funds are limited to qualified purchasers. But accredited investors may be able to participate through their adviser or a growing number of online platforms such as YieldStreet and Percent.
Private equity. Accredited investors can invest directly in private companies or in private funds, available through advisers, that pool stakes in several private firms. Private equity fund managers typically buy businesses, often combining investors’ money with loans against the assets of the business. They attempt to improve the profitability of the business and then sell off the parts or the whole to make money. The fees run about 1.5% a year, and many managers take a piece of any profits, too.
Returns have been rich of late. Private equity funds gained 22% annualized between 2019 and mid-2024, according to MSCI, compared with a 17% annualized rise in the S&P 500. But some private equity deals don’t work out. And many private equity funds bar withdrawals for months or even years and limit, or “gate,” the percentage of shares they will redeem to shareholders each year.
Investors may learn about private equity opportunities from friends, online platforms or advisers. Funds run by big private equity firms, such as Apollo or Blackstone, are typically available only through advisers.
Venture capital. These investments finance start-ups, typically, to help them develop or roll out new products or services. The goal is to hold on until investors earn a return, which can occur if the company is acquired or goes public. But most burgeoning businesses fail before either occurs.
Venture capital returns have been volatile recently. After notching better than 50% annual returns in 2020 and 2021, VC funds lost ground in each of the next two years, according to MSCI. And through June 2024, the most recent date for which data is available, VC funds are up just 1.0%.
Accredited investors can participate in a VC fund-raising round, but in most cases, they must have the right connections—for instance, as “friends or family.” Otherwise, crowdfunding online platforms, such as Republic and StartEngine, offer accredited investors access to VC opportunities for as little as $100.
Some advisers may also offer access to VC funds, though many require six-figure investments.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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