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Mindy: If you’ve ever wondered how the top 1% are actually allocating their money right now, not what they say on Twitter, not what the headlines say, but what they’re really doing with their finances, this episode is going to give you a rare look inside.
Mindy: Hello, hello, hello, and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen, and with me as always is my 100% co-host, Scott Trench.
Scott: Well, Mindy, that was really broken down that intro. Today, we’re going to be breaking down the 2026 asset allocation report from Long Angle, a private community of high-net worth investors. This is not theoretical. It’s real portfolio data across equities, real estate, private credit, and alternatives, showing exactly where sophisticated investors are putting capital in today’s market. To walk us through it, we’re joined by Tad Fallows, managing director at Long Angle. He has a front row seat to how these experienced investors are thinking about risk, return, and opportunity in 2026. Tad, welcome back to the BiggerPockets Money podcast.
Guest: Well, thank you so much for having me here today, Mindy and Scott.
Scott: Absolutely. We’re super excited to talk about this. So, just as a quick fresher, Tad, can you remind us a little bit about your personal background and journey to long angle, knowing that if folks are interested in much more detail on that, they can go back and listen to episode 688 of the BiggerPockets Money podcast.
Guest: I’m an entrepreneur by at heart. I started a software company in my early 20s, spent about 10 years growing that until my mid 30s, I sold that to a strategic acquirer and that’s what got me into long angle because I basically went on one day from having very little in the way of liquid assets to then having this one-time liquidity event and introduction to a bunch of new highnet worth challenges. Whether that’s things like we’re going to talk about today of asset allocation, whether that is child rearing and raising kids with wealth, whether that’s other more, you know, lifestyle, travel, health, kind of questions. And the reason I started this group is that I, you know, interviewed Goldman Sachs and credit Sus, etc. and I felt like they had very good information, but it just was this awkward dynamic of asking the barber if you needed a haircut. and I really wanted to make sure I was getting that advice from people in the same situation who did not have an agenda of something they were trying to sell me. So set up a group of initially a couple dozen friends who are other entrepreneurs or guys who’d started, you know, hedge funds, things like that. and um, of just looking for peer-to-peer advice on some of these high net worth questions. Over the past five years through word of mouth and people referring their friends, we’ve grown to about 8,000 people in that community. That’s my background and and how I got here.
Scott: Can you tell us a little bit about the research you conducted in preparation for today’s show? What did you collect and how is it useful?
Guest: Yeah, and this is about the fourth year we’ve done this. so we’re now getting a bit of a time sequence, but we just do a survey of all of our members and we say, hey, for our own sake. And then we decided a couple years ago, hey, let’s start sharing this information publicly because there’s nothing confidential here, but there’s a lot of useful information. So we interview all of our members and ask them on this survey across maybe 60 different asset classes, how do you break down your portfolio? So, you know, not just what do you have in stocks and bonds, but within stocks, what do you have in US stocks, international stocks, growth, employer stock, small cap, etc. and then same thing on different private asset classes of whether that’s private equity, venture capital, oil and gas, etc. And then we aggregate all that data together. So we have, you know, not all 8,000 people filled out, but we have hundreds of responses to this. We’re able to get some statistically significant information there and not just in total, but actually breaking that down by people who are younger and older or maybe, you know, people with 5 to 10 million of net worth versus those with 25 to 100 million of net worth, see what kind of trends you get on those dimensions. And then we wrote all up. We published this on our website. It’s free of charge for anyone who wants to uh to download it, but we’ll talk through it a bit here, but there’s we probably have, I don’t know, 25 page PDF that has a whole bunch of analysis. I’m kind of a data nerd by background. so just digging into each of these asset classes of hey, what’s the skew on real estate for people who again are of a certain age or of a certain professional background? How much they hold in real estate versus bonds, etc.
Scott: Well, awesome. Let’s let’s look through it.
Guest: Sure. So what we have here, where we try to start is just, hey, what are the top 10 takeaways this year? And I think that’s probably the right way for us to start the conversation. After these top 10 takeaways, we then basically go into each of the sub components here. So we go into stocks and look at, you know, foreign verse domestic or growth verse value, etc. But at a high level here, you know, we’ve got these top 10 here. I don’t know if we need to read all 10 out verbally, but I would say there’s a couple things here that kind of correlate together that people might find interesting. and at a high level, I’m going to compare this to like your prototypical 60-40 portfolio, 60% stocks, 40% bonds. And that really is not what it looks like for people in this demographic. And so again, the people we’re talking about here, let’s say your median person is somewhere around 15 million of investible assets. So, if you look at some, you know, 4% rule kind of thing, by and large, these are people who are in this financially independent retire early phase because these members also, they tend to be on the younger side, mostly 30s, 40s, early 50s. So it’s people who have generated significant amount of wealth early in life. and rather than taking a 60-40 position or even heavier in bonds, which you might think would be a more of a conservative approach, they definitely lead much more toward the equity-like and higher return element of things. So, we think of rather than 60-40, we think of 60 30 10, which 60%, again, still being in your stocks, but then rather 40% bonds, people only put about 10% in bonds and cash, and that other 30% there, that is made up of real estate and private and alternatives. Maybe about half of that in investment real estate and then about half of that in things like private equity, crypto, venture capital, and you know, have to go into more of those. So I think that’s the high-level takeaway and we can get into, you know, more nuances of that, but that’s probably the single most important insight from from my point of view.
Scott: You believe that this these investors portfolios reflect best practices? We’re distinguishing between what people actually do and what is the right asset allocation prescription. How would you opine on that?
Guest: I mean, I will say, I don’t know if this is controversial or not, but I would say there is not a single best practice. And and that sounds like, you know, kind of easy lawyerly thing to say, but I think there is a fundamental question again, if you get into a point where you have a significant amount of money and maybe you’re also still earning money, but you have enough money that you could take two different approaches to this. One you could say, hey, I’ve got $20 million dollars. I can afford to take a lot of risk. And if you think of risk and volatility as sort of synonyms. I don’t think they’re perfect synonyms, but for the moment, let let’s sort of use that. Say, I could afford for my portfolio to go down 50% next year because I’d still have $10 million dollars. I can still cover my expenses. I can wait for it to recover. So the thing that I may care about as somebody who’s 45 years old is what’s my portfolio going to look like when I pass away 45 years from now. And so I’d lean much more to a stock-like allocation. I think somebody could with equal logical rigor, take the exact opposite approach and say, hey, if I’ve got $20 million, I can just put that in safe treasury bills, I’ll make 600, 800,000 a year and take zero risk and have zero volatility to it. And so there’s no reason to have anything in stock-like instruments. So I don’t know that there’s actually a quote a right answer to that. I think it really comes down to to two things. One is what are your personal goals? Is your goal just to have some level of baseline level of spending. You calculate that. You say as long as I can cover it, then I just want as little risk as possible and I don’t care about any upside from here. Or again, is your goal maybe, hey, I’m perfectly fine spending $100,000 a year, I’d rather spend a million a year. I’d rather fly to Paris first class all the time, etc. and so I, you know, want my portfolio to have the chance to compound. So it’s personal goals and then I think there really is this, you know, risk talent. I think it’s not a bad way to put it, but I think it gets a little more nuance than that. But it’s just kind of what is your behavior going to look like? You know, I and my mid 40s. I’ve been through a few of these market cycles now, so I know what COVID felt like. I even remember what the great financial crisis felt like, which I think was a much more challenging era for investors and you know, I was in college during the.com crash, so remember that as well. And so I think there are some people who see that as, you know, it’s not pleasant for anybody, but some people will just find it unpleasant and basically stay the course and stick their portfolio allocation. and then there’s other people who just won’t do that. They will end up saying, oh, this time is different. I’m no longer a believer in stocks. I’m going to sell everything at the bottom. So I think it’s got to be that combination of what’s your risk appetite or risk tolerance and then what are your long-term goals.
Mindy: Tad, number five says, fire puts faith in stocks. Fire movement investors have the highest public equity concentrations. and number six says, financial advisors love private equity. advisor led portfolios focus more on diversification than self-managed. Do you think the lack of diversification that fire investors have is hurting their growth?
Guest: If you look over the past probably 10 years, you probably couldn’t have done any better than just putting all your money in the S&P 500, maybe you put it all in Nasdaq. So I think it’s been a bet to basically say, hey, I’m going all in the US stock market and that bet has paid off. So, you know, I’m somebody who’s been a little bit more disciplined for example about continuously rebalancing into international equities. That’s been a terrible move the last 20 years and I feel like I’m just throwing money away, but I don’t actually think that was necessarily a mistake. It’s kind of like I bought life insurance last year, I didn’t die. So maybe you could argue that I wasted money by having term insurance or maybe it was a smart thing. I think it’s similar on this idea of being all in in stocks versus being diversified. To my mind, your ideal world is a place where you can be diversified and so you take down the tail risk of something going wrong, whether that is, you know, as we talked about, a great financial crisis, whether, you know, if you were an investor in Argentina 100 years ago, that looked like the growth market of the future. It was almost as rich as the US. that turned out to be a bad place to have your money for the subsequent 100 years. There’s a variety of things you might want to diversify away from, but if you can do that without sacrificing your potential returns, and I think that’s what again, this point of saying, hey, don’t do a 6040. If you’re doing a 6040, you’re just saying, I am giving up return in order to reduce my volatility, but I think the investors who are not so heavy on stocks and more heavy on these other alternatives are saying, I want diversification, but I don’t want to sacrifice what I get to the long-term. So I think they probably are hurting themselves, not in terms of the actual returns they’ve received, but in terms of the amount of risk and volatility they’re taking on versus what they have to to get those returns.
Scott: Let’s talk about private equity real quick here because private equity is extremely expensive way to invest. 2 and 20 is the lowest fees you’re going to see in a in a private equity investment. Private equity companies typically concentrate. and if they’re not concentrating their in their investment thesis, then you’re a fool to invest with them, frankly, because the entire thing you’re paying 2 and 24 is concentrated expertise in a specific type of investment thesis. I also think that there’s a pretty heavy conflict of interest in many advisor led portfolio private equity allocations where the advisor is getting paid to place money in a private equity fund. To me, when I look at this data set, I would say, wow, there’s a big error being made. There’s a big mistake being made by these fairly wealthy people who are supposed to be sophisticated if they are investing in private equity through their financial planner rather than a directly led private equity thesis where they have a thesis, they’re exploring it, they’re finding the deals and placing their own capital. How would you react to that and how would you defend this allocation of these these wealthy people who seem to know what they’re doing?
Guest: I mean, I would say, I think there’s a lot of truth in what you’re saying, but there’s a few things I would disagree with. The first is that the net returns that you have seen historically on a lot of these alternative asset classes and it’s not just private equity, it’s also the other ones. They have actually met or exceeded what you see in public markets. Now, I think we could quibble with how they get there. Are they getting there by managing the companies better or is there a lot of internal leverage and internal embedded borrowing in these private equity portfolios that’s leading to those outside returns? There is a reason that the Harvard endowment, the Yale endowment, the Duke endowment are putting so much money into private markets and it’s not that they are getting sold by some, you know, financial advisor who’s convincing them to do something that’s irrational. I think there is a real fundamental long-term risk adjusted returns that you get out of those. That point, I would probably disagree with. I think the devil is certainly in the details there. The thing that I would agree with you at about is that there is this financial advisor conflict of interest and this is probably one of 100 different ways it it rears its head. We actually often see the very opposite conflict of interest in that. within the long angle community, there’s a number of kind of investment opportunities that people explore of saying, okay, you know, here’s a potential, again, private equity in your example, potential private equity opportunity, we’ve got access to, maybe here’s the traditional profile. And I have noticed the people who put, you know, some comment in there, hey, I’m going to talk with my financial advisor about this. They pretty much always come back with, no, he said it was a bad idea. And I think the the even bigger challenge than maybe the guy from JP Morgan being incentivized to put money into a JP Morgan private equity deal, is anybody who is paid a percentage of AUM, if you put that into a private market investment that that person does not manage, he has just lost his AUM and there is, I think it was uh HL Macon who said, there is nothing more difficult than making a man understand a thing that’s in his personal self-interest not to understand. And so they will always say it’s a bad idea to put your money into some investment because they don’t control. And this is not just private equity. I mean, I think another example is if somebody’s thinking about buying, if we think of the bigger pockets world, if I’m thinking about buying an investment property, maybe I want to buy a warehouse myself. I have enough money to do that. My financial advisor is going to see, okay, there’s now 3 million that I was collecting 30 grand a year on, that’s now just going to own this building and I’m not getting 30 grand a year on that anymore. And so it’s going to probably advise against that investment. So I think it’s absolutely critical as you were saying to really understand where their motivations come from. I would ask my financial advisor directly, hey, are you only getting paid the 1% of my money or say 75 basis points that I’m paying you or do you have any other form of marketing fee, promotion, kickback, incentive structure, threshold? There’s, you know, it’s like a hydra where it keeps popping up some other version of them getting paid. But I think that’s absolutely critical to understand. I don’t think that’s the primary driver to these financial advisors clients being more there. I am inclined to believe that they are sophisticated enough to kind of see through those conflicts of interest, but you’re absolutely right that if you have a financial advisor, you you got to dig deep. I will say most of our members do not, probably three quarters of them self-manage their portfolios rather than working with a a RIA.
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Mindy: Tad, is the inflationary environment that we’ve been in affecting how these high-net-worth individuals are investing or are they kind of ignoring that?
Guest: I think it probably is a reason why, you know, we talked about people only having 10% of their net worth in a combination of sponse and cash. And I think a lot of that comes from this inflationary environment. If somebody’s saying, hey, if I’m guaranteed a headline return of three to 4% before inflation, that means I’m basically treading water after inflation. And so it just does not look very interesting for somebody who says, I’ve got a 30 or a 50-year outlook on my portfolio to put money into something that’s basically just going to track inflation. So I think that’s probably a big part of the reason that people are in either public equities, private equities or you know, crypto, energy, real estate, stuff that tends to at least meet if not beat inflation.
Mindy: I found it a bit interesting that a little bit further in the report that higher up your net worth goes, the lower amount of investment real estate you have.
Guest: I also find the private real estate interesting where not surprisingly, people with more money end up buying a bigger house, but it does not scale nearly with the amount you’d expect that, you know, somebody with 25 million having maybe a two and a half million dollar house. So it really becomes a relatively small proportion of their net worth as they move up the asset ladder. I think in terms of why people, let’s say somebody who has 50 million, most of them don’t have as much of the investment real estate. I’ve basically put this people in two categories. One, there’s the set of people who made $50 million by being real estate investors, which is relatively small. And then there’s the people who made 50 million by a whole variety of things. You know, I worked in tech, I started a company doing X, I had a very successful, you know, banking or consulting career. For any of those people who fall in the other categories, I think beyond a certain point, real estate becomes a relatively time consuming and challenging asset for them to manage where, you know, I’ve got two private rental properties and you know, that’s fine. They’ve given me very good returns. They’re not that hard to manage, but if you told me, hey, you woke up tomorrow with 10 times as much money and now you’re managing a portfolio of 20 properties, that’s going to be a giant pain, right? Every day I’m going to be dealing with a plumber, I’m going to be dealing with a property manager. There’s just only so much money you can put to work there unless you go into a truly passive, my money’s in a reat, my money’s in some fund and I don’t do any of the hands-on management. But when I think when you get to that level, the ability for those funds. I think real estate can significantly outperform when you’re doing it yourself, you’re putting the leverage yourself, but when you’re just a passive investor in these funds, it’s not actually that much more attractive than, you know, other private equity type asset classes.
Scott: How much of that do you think is selection bias for long angle? Does long angle attract certain types of investors there versus real estate investors who are successful hang out on bigger pockets?
Guest: That certainly could be the case. You know, we we do attract people who have tend to have significant success earlier in their careers. So I’d say our median member, again, is probably $15 million and maybe 40 years old. My impression is that it’s a little bit easier to hit those kinds of net worth 15 years into your career if you’re doing something like being an entrepreneur or having, you know, a very successful career in tech or finance. I think real estate may be more of a kind of compounding game where you’d get to that $15 million mark, maybe, you know, a decade later in the career. So I think that that may be part of it. It may be just the the quality of the bigger pockets community has uh kept those people excited.
Mindy: I want to move to this page which shows private company equity allocations rise as net worth increases and more importantly, I’m looking at the investment real estate and the home equity. The investment real estate goes down between the $2 million to $10 million net worth and the $25 million net worth. Does that investment real estate include privately held rental properties and reats? Is it all investment properties?
Guest: Yes, it’s all investment properties, but it tends to be very heavily in the privately held. People have some read hold holdings or some, you know, various kinds of real estate fund holdings, but it’s much more people owning, you know, whether it’s a fourplex here or, you know, small multi-family things like that.
Scott: And does private company equity imply private equity or can I own a business and that’s my private company equity.
Guest: It’s both of those. Or a third category may be that you work at a company and have stock in that privately held company that you work at. You think, over the next 12 to 24 months, you’re probably going to have SpaceX, Open AI, and thropic, you know, companies like that going public and they will create thousands and thousands of people with tens of millions of dollars. And so there’s also, I think a significant chunk of people who are in that situation. So it can be all three. I would say private equity in the traditional sense of I’m going to KKR and giving them a million dollars and they’ll use it over five years to buy companies. Usually, people put their money there once they have money. You don’t usually become wealthy that way because there’s very high initial buy in. So you’ll often become wealthy by starting a company or working at a company and then later you will stay wealthy by private equity of diversifying it across these different um asset classes here.
Scott: You know, it’s a very interesting dynamic of these people who, you know, my journey as I mentioned was that I started a company and then sold it. So one advantage I have is I had in full liquidity and then could allocate my portfolio, you know, to the best of my abilities. The person who is, let’s say they are at SpaceX right now and SpaceX goes public, they’re all of a sudden going to be in this situation where on day two of that, maybe they’ve got $20 million dollars and 18 million of it is in this single SpaceX stock. And then they’ll have these questions of, okay, well, how do I diversify that holding? Even if you get past these mandatory SEC holding periods, if I sell it all today, then I’m going to have a massive tax bill, you know, and so how do I think about how much should I take the tax hit and slowly or should I diversify more slowly? Happy to get to that a little bit, but that’s a dynamic that a lot of people cover is whether it’s from, you know, making a smart bed on crypto or something else. People often end up much more concentrated than they expect when they first get wealth and think about different ways to diversify that concentration.
Scott: Yeah, we’re going to do a deep dive on how to think about the problem, the good problem of having a very concentrated position in company stock and how to bridge from that position to a target portfolio tax efficiently. All those, the various considerations. It matters how big the pile is. It matters how big your net worth is. It matters what your income tax brackets are. It matters where the net investment income tax threshold is for your tax bracket depending on how big this buy is. Um sometimes the number is so big that you have new problems can get kind of crushed through all these tax bracket issues. But yeah, it’s a it’s a fun problem to have and pretty interesting topic. On the topic of this net worth, how would you describe the conservatism or aggression of private asset valuation by your community? And what I mean by that is when I was CEO of Bigger Pockets, you know, I had my net worth over here, and then I had bigger pockets equity. and I literally counted it as zero. It never even showed up my net worth statement. It was clearly not worth zero. And I do that with many assets today in my position. My personal net worth statement reflects a very conservative interpretation of my net worth as a result. Is that common in the community or would you say that people are aggressive or real?
Guest: I would say that’s incredibly common. Most people who start a company basically value it at zero until the point where they actually get liquidity and so their net worth may appear to just go up tenfold the day they they sell it. I think if you look at people who are investing in private companies or private equity, then you also have this question where if I made some seed stage investment in Anthropic, well certainly that’s worth a lot today and I can look at their series E and put a valuation on it. but there were probably the first five years there where that was actually generating a lot of economic value, but I had no way to put a number on that. So I would say most people tend to just carry their investments at cost at least until there is some meaningful third-party, you know, exogenous event that allows them to put a valuation on that. And then they might still discount it a bit for the fact that it’s not totally liquid. But people who are working at company or starting a company in general will carry that zero pretty far into it. You know, again, it becomes unreasonable at a certain point like you look at, you know, Cargilll is still a private company 100 years later and all the Cargilll heirs are getting a million dollars a year in distributions. Clearly Cargilll is worth something, but if you’re talking about your random AI company out there, probably the right thing to do is to carry that zero because it could turn out to be great, but at this point you still have a lottery ticket.
Scott: So would you say that for some of these positions, especially those with more allocated to private company equity, that net worth is dramatically understated and that the rich are far richer than they appear in survey data or net worth statements?
Guest: I think that is probably fair. I I think we could argue about the degree to which it’s understated, but the direction is certainly true. Now what often happens for a lot of these people is if you are selling your company, you can basically do two things. One is, you know, what I did, I sold it to a strategic acquirer, so they said, okay, we own 100% and you get a pile of cash and it’s a very clean transaction. If you’re selling to a private equity acquirer, that is pretty rare. Usually they will say, okay, we’ll buy 70% of the company, but we want you to roll a third of your equity. So even though somebody’s getting a lot of cash, they still have a significant amount of exposure to this company and that’s the reason the private equity firm does it is they want to make sure that the management team is still incentivized to continue to drive value there. and I think that’s a significant amount of what you see in these private company equities, it becomes easier to value because there has been transaction, so I know it’s worth something, but it will continue to be a big part of my balance sheet. And a lot of those people to your point about understating it, I’ve met many members of the community who have gone through this path and almost to a person, the money that they rolled into their private equity deal ended up being worth as much or more that 30% they rolled was worth more ultimately than the 70% they go in cash. And I didn’t believe this initially, remember when I was selling my company, I’d have private equity firms pitching to me this to me, and I thought they were just totally talking their book. I I discounted that, but I’ve now seen it time and again. And this is part of the reason probably that I, you know, Scott, give you a little push back on this idea of private equity being overpriced because when I’ve seen these people and they roll a million dollars in their PE deal, there’s one thing these PE firms are very good at and that is continuing to drive high returns and make good money and I’ve seen enough times to kind of have a little more conviction in their ability to do that. So I do think that that is probably a level of factor both in you’re saying of under stating and then also in terms of this general divergence of, you know, wealthier people having higher returns than less wealthy people. There’s probably a lot of factors in terms of, you know, efficiency, in terms of ability to stick through with hard times, but I do think exposure to some of these higher return asset classes like private equity is probably a factor there as well.
Scott: I believe you for stuff bought, you know, 10, 20 years ago, but I’m more skeptical about how, like we’re seeing all these private debt funds blowing up. If they’re blowing up, guess what’s happening to the equity side on that. Like these assets are all lending to private equity companies. So you know, I think I think that that’s where that’s where my skepticism is. I think there’s a lot of private equity wealth that’s rolled in the last 20 years and I think that uh one of the challenges is going to happen now is I think that the liquidity for that market has compressed a little bit. It’s coming back, I think, but I think that folks are going to if you have a loser, you don’t mark it down until you absolutely have to. And when that happens, that’s when, you know, at some point those losers will be marked down and that will change the return profile for private equity, I think in some some capacity. But that’s a whole different rabbit hole to to dive down.
Guest: The only thing I would say on that point there is I think that gets exactly to this idea of diversification. Like I don’t think that just adding private equity to your portfolio now makes you diversified. And in some ways it’s probably the least effective diversifier of the private markets because if you look at the names, stocks are called quote, public equities, and then private equity are private equities, and they’re very close cousins of each other, right? They’re similar kinds of companies in general, the private equity companies are a little smaller than the public companies, but in some cases they’re gigantic, they’re not necessarily smaller. So I think they’re actually relatively close cousins. you know, as a little bit of an aside, but, you know, for your listeners, to my mind, the things that add maybe even more value in terms of being still giving you your your double digit returns, but having much less correlation, are things like litigation finance, for example, that is where you basically, if somebody, you know, let’s say they’re generally B2B lawsuits. So one company is suing another company, the small company has been wronged, but they don’t have the deep enough pockets to sue the larger company that’s wrong them. you basically can fund their lawsuit and then you get a portion of the payouts. That has had, you know, absolutely phenomenal historical returns, probably, you know, absurdly good like 30% per year over a long period of time. As that asset class matures, I’m sure those returns will come down, they won’t stay in the 30s, maybe it’ll come down to the teens. But your correlation to public equities is just completely different there. You know, it’s not based on the economy or the stock market going up and down whether a company is going to win or lose a lawsuit. It’s how good is the manager you’re investing with at picking which lawsuits are valid. Um you know, another example might be oil and gas investing. This is something I’ve been very hot on for a long time. You know, it’s easy to say, okay, well right now with the Iran war, those guys are minting money and that is true, but the returns have been very strong. Not always consistently strong, on average, they’ve been strong in these, but they tend to have a bit of inverse correlation with the stock market where if you think something like COVID was probably bad for everybody, although people all came back quickly. it’s not totally abnormal something like the current state with the Iran war, which is very bad for most companies, but is great for the energy industry. That’s kind of happened more than once. So I think there’s a variety of these other asset classes that are not just private equity which give you a little more diversification there and you may not have these exact risks you’re talking about of, okay, there’s a sort of fundamental mispricing of, you know, of that or in aggregate private equity is maybe getting stretched on valuation.
Scott: Let’s go back to the allocation by net worth. I asked you earlier if you thought that many of these high-net-worth individuals are conservative in valuing their current portfolios, especially private company equity and private private equity investments that they’ve made. On the flip side of that, a common challenge, I think, that happens at this level is going to be that your net worth is overstated because its components of it are pre-tax or have not, you know, there there’s a large capital gain to be realized in some of these investments. So in that two to 10 million dollar net worth range, I wouldn’t be surprised if a big bucket of the stock, the public equity portfolio is in a pre-tax 401K for various components like that. I wouldn’t be surprised if a lot of that is gains from early investments, and I wouldn’t be surprised that a lot of that company equity once it is marked to market is pre-tax. And at this point, you have pretty substantial marginal tax bracket challenges, right? If you’re in the 10 or 25 million dollar net worth range and you’ve got a several million dollar gain, that’s 20% marginal federal taxes. That’s in Colorado, 4.4% state tax, that can be much higher depending on what state you’re in. And then you’ve also got net investment income tax on top of that. So you could bump it up to the high 20s approaching 30%. On California, you’re almost 40% in California. You got 13.3 there. So, certainly true. Do you think on the flip side of this that a lot of these net worth positions are overstated by some of these folks because they’re heavily pre-tax positions?
Guest: I don’t think so. And my reason for that is if you have $50 million, you are not goin to liquidate that portfolio probably ever. So if I have 50 million maybe I put half a million into Nvidia 20 years ago, made a great bet, so now I’ve got, let’s call it 50 million Nvidia stock. Well, I’m actually probably making a lot of dividends as it is on Nvidia. So to take a step back, you know, as you know, there’s two kinds of income. There’s your earned income and then there’s your capital gains and your investment income. What I have seen, you know, in the community is there are a lot of ways to mitigate the tax hit impact of investment income or capital gains. There’s very few legal and ethical ways to mitigate, you know, people try and do it, and the IRS keeps catching them, they people still think it’s a good idea to try and mitigate their W2 income, there’s a few legal things, and you know, most of them are in the real estate world, but by and large, that’s hard to mitigate. But if you look at these untaxed capital gains, you know, I think you said you’re going to do maybe a separate episode on that, so I don’t want to kind of steal all the thunder there. But just as a few examples of the kind of things that you see people do. One is the classic buy borrow die portfolio. You’ve probably heard of this concept, which is say, okay, I bought this asset. Again, now I’ve got my 50 million of Nvidia stock. If I need to spend $5 million, well, I’ll just borrow $5 million secured against this Nvidia stock. and whenever I pass away, then my estate will get a free mark up on the basis of that. They can sell as much as they want to, they can pay it off, and that gain is never realized in the Nvidia stock. Other examples, you know, you can make a donation to charity and you don’t ever have to realize the gain when you donate to charity, you certainly have lost the money, so that’s not a quote tax strategy, but um, you know, that’s another example. And then there’s things like direct indexing and tax loss harvesting or exchange funds. And so, you know, I’d say my general takeaway is there are quite a number of ways that people can reduce or mitigate that. There’s also a bit of timing of when you take your gains of if you’ve got a $10 million dollars of gains in your portfolio and maybe you quit your job because you’re financially independent, so next year you have no earned income. Well you say, okay, maybe I’ll sell enough that I have a quarter million dollars of gains, so I’ll use up my low tax brackets and I’ll have a relatively small tax hit on this and then the next year, again, I’ll use up small tax brackets and then if I get a job again, I’ll stop selling so you can kind of manipulate the timing of those sales to reduce the the tax burden. So it’s certainly true if you wanted to turned all the cash today, you’d have a problem, but I don’t see most people turning most things into cash without, you know, following one of these sort of more creative strategies to to go about it. And then you also get into which I maybe talk about a bit on these sort of trust structuring and insurance kinds of strategies which can also provide some real tax benefits at at higher net worth levels.
Scott: One hypothesis I’d have here is that for this demographic, $10 million to $25 million or more in net worth, this will be the lowest tax environment they’re ever going to see for the rest of their lives. Like I think that’s the bet you’d have to make if you’re rational at this level of wealth. Would you say that many of the people in the community agree with that and does that inform their tax strategy at all?
Guest: I would say most people agree with that. We have a rule of no politics in our platform. We say there’s not another place where we need to debate, you know, whether Donald Trump is a great or a terrible person. You know, you can find whatever self-validating opinions you want on that online. So we try and keep that out of the community. So that probably mitigates some of these discussions about where tax rates are going. But I think you’re right. You know, if you just look at the kind of structural deficit we have, I don’t really see how we could have another round of massive tax cuts. You know, nobody’s going to cut the social safety net, so there’s only one realistic direction in my mind unless it’s just inflation. But does it inform behavior? I don’t think people are saying, hey, I’m going to go ahead and pull forward my tax bill today to reduce the risk of I may have a bigger tax bill tomorrow. I think people just, you know, that’s against human nature. Nobody likes seeing their tax bill today. You know, I could have said the same thing to you before George W Bush came in office. they would have been a bad idea to cut taxes. And then he went and cut them a lot. And then Trump cut them a lot more beyond there. Well, I agree, it seems like they ought to go up. I’m not sure that history has shown us when that’s going to happen. So we, we don’t see that. You do see people though, you know, trying to be, just say, okay, given the tax environment as it does exist today, what are the things that I can do to keep the portfolio I want, but kind of put it in a structure so that is tax efficient. You know, I’ll give you another example which is private placement life insurance. Obviously, I’m the first person to tell you that whole life insurance or that, you know, 99% of permanent life insurance is a terrible deal. It’s sort of pitched by these salesmen who confuse a whole bunch of things and have a lot of hand waving and you don’t understand what’s happening, but they’re getting very high fees. I will say that private placement life insurance is a bit of an exception on this where it’s one where it tends to be for very high dollar values, but for things like private credit or multi-strat hedge funds that, you know, make 10 or 12% ordinary income each year, it can protect those from both capital gains and ordinary income and you only have about 1% a year fee drag on that. So I think there’s some, you know, kind of more complex strategies that that people will employ.
Scott: We made it through net worth so far. what other uh uh interesting segments of this? You want to flip through and show off some of the data?
Guest: Yeah, I mean, I think something else that’s interesting is the flip side of people not being willing to take a lot of risk, as you might say, and not hold a lot of bonds is they don’t take a lot of risk on the borrowing side. The total aggregate amount of debt is much lower than you might expect. So 40% of members don’t owe any mortgage at all. Either because a few of them just don’t own a house, but then, you know, a full third of people own their house free and clear with no debt. And then even beyond that, if you look at things like borrowing against your portfolio, most people just don’t take on nearly as much debt as they could. And you know, if you look long-term returns, you say, well, maybe it would be profit maximizing to take on more leverage and have higher returns, but in practice, people seem to say, okay, I’ve got enough money, I don’t need to take this sort of silly risk that could risk a total blow up. I’ll invest my money, you know, on the more aggressive side in the spectrum and equities, but then I won’t take outge leverage position and you know, risk being a, you know, having a margin call and being a for seller in a bad environment. and you know Franklin, I think that’s that’s a pretty smart move and one that I probably take more debt than most people on here because I’ve got a lot of real estate backed debt, but most people being conservative on that front.
Scott: Tad, is that changed in the last couple of years? Like did you have studies before interest rates started rising?
Guest: The biggest thing that’s changed is if you looked during COVID, people were just much more bullish on buying real estate. I think it was a fairly simple analysis to say, look, you’ve got the government spending like a drunken sailor and you can borrow money at two, two and a half percent, which is where most people actually locked in their mortgage. And so it’s almost guaranteed that inflation is going to be higher than paying on this debt and I can lock it in for 30 years fixed. And so I think at that point, people were very heavy on the real estate acquisition spree. Today, I think people are much less, they’re not necessally selling their real estate, but they’re not putting fresh capital to work there. They say it’s a very different analysis. If I have to spend four and a half percent and I don’t think inflation’s going to exceed four and a half percent, I can get better returns elsewhere. So that that’s really what we’ve seen is that and I think that’s probably a good takeaway to think about from this is you can have a pie chart on any given day of what the allocation looks like, but some of that is legacy of, you know, as you were saying with private equity, maybe it was a, you know, you thought it was a better deal 10 years ago. People may still be holding those holdings they built up then. I think real estate a lot of it is people are holding the real estate they bought then, but that doesn’t mean that they’re putting new dollars to work at the same ratios as they were historically.
Mindy: As a real estate agent, I know that a lot of my investor clients have significantly dropped off their acquisitions just because the numbers aren’t making sense at a 6% mortgage in my market.
Guest: Yeah, and I think, you know, I don’t need to explain to you, you’ve got the flip side is I think the sellers is also being rational because the sellers is saying, well, I’m locked in at a two and a half percent mortgage. So I don’t need to take a haircut just to make your economics work and you don’t need to pay up to make my economics work. And so, you know, we can both be totally rational and looking at the same deal the same way and both agree that there is no market clearing price. My local market here, that’s the same thing that I’m seeing. I’m not selling, I moved to a new house. I didn’t sell the old one because I could get much more money renting it out, but it’s not like I’m going to buy three more rentals.
Scott: I don’t know if if I’m if I’m common or unusual as a member of this cohort here, but I find it to be very advantageous to reduce all fixed costs in my life as much as I possibly can because that allows me to realize very little income. So having no mortgage means that I can live the lifestyle of a neighbor that, you know, around here that that might have a very pretty pretty expensive mortgage. I got a nice house. That’s a huge, huge advantage for me. And because I would I I I will be in a high income tax bracket most years, not the highest, but in a high tax bracket, that’s a pretty big advantage for me. And so not having a car payment, same deal, right? Very little income you have to realize if you’re driving that thing for the next 7 to 10 years. And then there’s lower insurance because I I can have a high deductible because I’ve got a strong cash position and those types of things. Do you find that that attention to not necessarily discretionary spending, maybe I’ll go out to a nice restaurant, maybe I’ll go on a nice vacation, but is there a shared obsession in this cohort with reducing those fixed expenses for that reason?
Guest: I would say that there is on the specific thing of fixed expenses like, hey, should I have a mortgage or should I not have a mortgage? I think that really just comes down to personal preference. Some people will say, I think I can make 10% investing that money in stocks, so if I can borrow it from the bank at 3%, there’s no reason to pay down my 3% mortgage and and sacrifice the 10% returns. Other people and a lot of them take the exact philosophy you’re talking about of I care about my cash flow. I don’t care about the theoretical 10% gain that may or may not materialize and I may or may not crystallize. I just want to have, you know, my cash flow uh be more attractive. We see that both ways. What I do think is very consistent is this idea of you could expect that somebody with $25 million isn’t really going to care about the pennies. They’re going to be, you know, indifferent to costs on a variety of functions, but it’s much more exactly what you talked about. They’re willing to spend a lot of money for something they really want, but they are going to be thoughtful about their spending for something that they think should be a commodity. So I think at the beginning, you know, you probably let your cards show in your perspective of financial advisors and I think that’s very common in our community of somebody saying, hey, 75 basis points, you know, three quarters of a percent, that may sound like a small headline number, but if you’ve got $10 million, that’s really $75,000 a year. That’s a ton of money and that’s after tax. that’s the same as earning $150,000 a year that the reason that probably three quarters of the members don’t have an RIA is some combination of this concern about conflicts of interest and then just frankly not wanting to spend that much money on it. And I think the same thing could go across a lot of different spending categories. So I think even though people are wealthy, that doesn’t mean that they ignore the costs, but the flip side is if there is some fancy, you know, there’s some trip they want to go on, there’s some restaurant they want to eat at, they’re perfectly comfortable writing the check provided it’s a place that, you know, they actually think is is fair value for money.
Mindy: Tad, not all of our listeners have a net worth of $25 million. I don’t think Scott or I have a net worth of I don’t think we have a net worth of $25 million combined. So I’m not throwing you listeners under the bus, but how can they read this report and take action that would work for them? How can they apply this to themselves?
Guest: I think almost everything in here applies. You know, partly because a lot of these things don’t have as high of minimums as you might think. Like if you listen to this and say, okay, there’s a certain kind of, you know, this litigation finance sounds interesting, there’s ways and and actually we do a lot of this in the community of trying to kind of get these economies of scale because again, our average member doesn’t have 25 million either. As I said, the meeting person maybe, you know, 10 or 15 million. and so they might say, well litigation finance sounds interesting, but I’m not going to put 2 million out of my 10 into this one, you know, litigation finance deal that I I think it’s interesting, but I I don’t know if I have that much conviction. We do like syndicated investments there, well they’ll bring the minimum down to maybe $100,000. So they say, okay, well now I need to just put 1% of my net worth. I can actually try it out, see how this I like it and then if this goes well, I can scale it up from there. So even, you know, the bare minimums, I think tend to be a lot of this I’d say is probably less relevant for somebody maybe with, you know, one or two million dollars, but I think when you get to a point where you’re talking $5 million or more, it’s really just scaling everything by percentage basis and from an absolute perspective, I think it’s almost all relevant. and even things that you might think are not relevant like a state tax being a great example, where, you know, the limit on exclusions from state tax today is $15 million for an individual or $30 million for a couple. So you might say, Mindy, you know, I don’t know how much money you have, but let’s say you have, you know, you’re 40 years old and you have $10 million dollars, you’re actually almost certain to break that $30 million dollar threshold by the time you pass away. And so, you know, these things become relevant again, you you sort of reach a certain escape velocity if your passive income and your appreciation is exceeding your spending, and then, you know, the kind of people who have made a lot of money also tend to keep working even if they don’t have to, and so the the net worth tends to go up quickly. So I do think it’s actually quite quite relevant. And, you know, these same ideas about like, hey, how much debt should I take on? Should I really be borrowing against my stocks to try and juice a couple extra points or should I not take that risk so that the next time stocks fall 50%, I’m not risking a margin call. All that is equally applicable to serve no matter how much money you have.
Mindy: I love that you think I’m 40. Thank you, Ted. You’re now my favorite person. Is there a way that a non-member can read this report?
Guest: Yes, it is totally freely available on our website. You just go to longangle.com and we’ve got this, we’ve got a number of other reports. We also have an income and spending one, does a similar breakdown and people, okay, how much of their money do they spend on travel? How much do they save? What do they spend on insurance, etc. We also have one on professional service providers of in terms of how much are people spending on their lawyer and their gardener and their nanny, etc. and how happy are they. We try and publish as much as we can of the data from our community to everybody publicly.
Scott: Well Tad, thank you so much for coming on back on the Bigger Pockets Money podcast. We’ll have a lots more to talk about I think in in future episodes as well because we do want to cover this. We feel like, you know, for the goal of Bigger Pockets Money is to help people get to like kind of this two and a half million dollar net worth target. Goals in the community often range from 1 to 5 million, but as a byproduct of getting to that point, many folks will happen to get much wealthier than that. And so we actually finally have a pretty good overlap with the long-angle community among our listeners. So that’s been a place where several members have joined up and had great things to say. So thanks for coming back on and sharing that data with us and I think it’s aspirational for a lot of folks hopefully who listen to bigger pocket’s money for long enough. You’ll have this problem one day of of needing to figure out how to invest like the wealthy because you’ll have a portfolio that reflects a lot of wealth.
Guest: Yeah, no, thank you for having me. I think we actually have almost 100 members who are overlap, you know, both bigger pockets members and have joined on Long Angle community. And one of the thing I would mention just didn’t come up here, but our community is is there’s no membership fees. So I think people may say, oh, this seems like something’s got to cost 10 grand a year, but we decided not to charge anything for membership. So if people have heard this and are interested in being part of the community, you can click apply now and that will set you up basically for an interview or a live discussion with a current member who’ll just tell you more about it. You can see if it seems interesting to you and, you know, you can tell them more about yourself.
Mindy: Awesome. Yeah. I am a member and I love this community. It’s so refreshing to be able to speak to people on a a higher level about problems that I am having that, you know, maybe somebody isn’t having without the same level of wealth and that seems like such a snotty thing to say, I don’t know how to say it any better, so I’m just going to leave that in. Tad, thank you so much for joining us. It was a lot of fun. and we will talk to you soon.
Guest: Well, thanks so much for having me today, Mindy and Scott.
Mindy: All right, Scott, that was Tad Fallows from Long Angle and that was quite the interesting look into how high net worth individuals invest. What did you think of this report, Scott?
Scott: I thought it was an acute take. I’m sorry, I couldn’t resist. on the the patterns and behaviors and actual data of the top 1%. So I think there’s probably a little bit of of confirmation bias in the survey because the community probably attracts people of of certain dispositions there, certainly younger people in the net worth range, but I still think it’s a very fascinating view into how wealth is managed by the ultra-wealthy in America, especially those in the younger cohorts, 30s to 50s.
Mindy: Yeah, I was particularly surprised at the bonds because you keep hearing 60, 40 bonds, 60, 40 bonds and there that’s not represented in this group. Although, on the other hand, bonds are to protect your portfolio. So if your portfolio is so much bigger than you will ever need, it doesn’t really need that much protection. So I guess it makes sense. It’s just weird to see like people who have high net worth in my opinion are super knowledgeable about financial everything. So clearly they should be doing everything right. and the reality is, you know, like Ted said, some people had a rather modest net worth and all of a sudden they have a high net worth. So they’re trying to uh figure this out, which is what Long Angle is all about. It’s a space where you can go to ask people questions who are in a similar situation. If our listeners want to read this research, this uh report is really, really interesting, you can find it at longngle.com. You don’t need to have a membership to read this report. You just go to the resources tab and look at all research and studies. This is available as well as several other studies that they have done that are really, really fascinating all around money.
Scott: Absolutely. Mindy, should we get out of here?
Mindy: Yes, Scott, we should, but I want to remind our audience that if they want more financial independence information, they can head over to our website, biggerpocketsmoney.com. You can sign up for our weekly newsletter. You can also find free resources, calculators, and templates all designed to help you accelerate your fi journey.
Scott: And one of the new things that’s coming out on the Bigger Pockets Money website is ask a question. Go to the community tab on biggerpocketsmoney.com and fill out a question for Mindy and I and we’ll try to answer it to the best of our ability. Free only for entertainment purposes only, of course. Um as a note, Mindy and I have answered questions from listeners for many years. We’re going to continue to do that. We just hope to do more of that on the bigger pockets money website so that other people can benefit from that experience. and of course, we will anonymize um that as a default unless youve prefer to have your real name or are willing to have your real name and numbers shown on the website there. So, please feel free to ask us questions through the ask a question format on the website on a go forward basis and we’ll look forward to uh hearing from you.
Mindy: All right, Scott. Now, that wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jensen saying stay keen Lima Bean.
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