Wealth Allocations: What People Do vs. What Works

Introduction: Are We Investing the Right Way?

Most investors build their portfolios based on what they see others doing, instincts, and risk-tolerance. But how do these real-world allocations compare to what’s recommended by financial theory and advisors focused on optimizing long-term returns? I also want to explore what some constraints and barriers of entry there are for growing high wealth.

This article compares actual asset allocations across net worth tiers to recommended strategies backed by research and theory, then evaluates how those choices affect wealth generation potential and risk exposure.

Rather than telling you what to do, this article offers options to help you get more from your wealth, no matter where you’re starting. It is meant to help empower readers by showing different strategies and give options for improvement on portfolio performance through diversification and reallocation.

This is a long article, so here are some key takeaways before diving deeper:

📊 Key Takeaways: Wealth Allocation Patterns

  • Many investors underutilize high-return asset classes like stocks, alternatives, and private equity. This may be due to limited access, lack of education, or psychological factors such as fear of stock market volatility — leading to a preference for cash and real estate.

  • Portfolio allocations often reflect life circumstances more than theoretical optimality. Income stability, debt levels, family obligations, and liquidity needs all influence decisions.

  • Wealthier investors tend to hold more in alternatives and private equity, which may contribute to higher effective returns. As access and experience grow, portfolio shifts may become more feasible.

  • Diversification helps balance return and risk, especially as portfolios grow. It’s not just about chasing the highest return, but managing volatility and protecting wealth across different life stages.

Section 1: How People Actually Allocate Wealth

Real-world portfolio allocations often deviate significantly from textbook strategies. Based on updated data from the Federal Reserve Survey of Consumer Finances (SCF), Richmond Fed, Tiger 21, SmartAsset, and BofA Global Wealth Report, here’s how different wealth tiers tend to allocate capital — along with their approximate expected long-term returns.

Net Worth Tier Public Equities Private Equity / Business Real Estate Alternatives Cash / Bonds Est. Return (Net)
< $250K 15–25% ~0% 40–50% 0–5% 30–40% ~3.5–4.5%
$250K–$1M 30–40% <5% 30–40% 5–10% 15–25% ~4.5–5.5%
$1–5M 40–50% 5–10% 25–35% 5–10% 10–15% ~5.5–6.5%
$5–25M 50–60% 10–20% 15–25% 5–15% 5–10% ~6.5–7.5%
$25–50M 45–55% 20–30% 10–20% 10–15% <10% ~7–8%
$50M+ 40–50% 30–40% 10–20% 15–20% <10% ~7.5–8.5%

🔍 Note: Estimates based on aggregated public data and investment research. “Alternatives” includes hedge funds, private credit, commodities, collectibles, structured products, and crypto. “Real Estate” includes both primary residences and investment property. “Private Equity / Business” includes direct business ownership.

Sources:

Section 2: Proposed Optimization of Wealth Allocations for Long-Term Returns

Estimates for Expected Returns by Asset Class
(Real returns unless noted otherwise — net of inflation, based on long-term historical data)

  • Public Equities: ~6–8% real return
  • Private Equity / Business Ownership: ~8–12% IRR (nominal) (McKinsey Global Private Markets Report)
  • Real Estate: ~6–8% long-term blended return (NAREIT)
  • Alternatives: 4–10%, but highly variable based on asset type and strategy
  • Bonds / Cash: ~2–5% depending on inflation and rate environment (Morningstar)

These proposed allocations are informed by frameworks from Bogleheads, the Yale Endowment Model, Morningstar, and best-practice institutional research — while still respecting accessibility and liquidity constraints at different wealth tiers.

Net Worth Tier Public Equities Private Equity / Business Real Estate Alternatives Cash / Bonds Est. Return (Net)
< $250K 60–70% 0% 10–20% 0–2% 20–30% ~5.0–6.0%
$250K–$1M 60–70% 0–5% 15–20% 2–5% 15–20% ~6.0–6.5%
$1–5M 55–65% 5–10% 15–20% 5–10% 10–15% ~6.5–7.5%
$5–25M 40–50% 20–30% 15–20% 10–15% 5–10% ~7.5–8.5%
$25–50M 30–40% 30–40% 20–25% 15–20% <10% ~8.0–9.0%
$50M+ 25–35% 40–50% 20–25% 15–25% <10% ~8.5–9.5%

⚠️ Note: Estimated returns are not guaranteed and reflect expected real (inflation-adjusted) performance based on multi-decade averages. Tax strategy, access to institutional products, and manager skill can all impact outcomes.

Considerations:

  • Investors below $1M net worth are often best served by low-cost, diversified ETFs and mutual funds across stocks, bonds, and REITs. See conclusions at the end for more details.
  • Private equity and many alts remain inaccessible or high-cost until at least the $1–5M tier unless using limited proxies like ETFs (e.g., PSP or interval funds).
  • High-net-worth investors increasingly pursue tax-advantaged structures (e.g., private real estate syndicates, carried interest, step-up basis, etc.) to enhance returns.

Note on Alternatives: Includes hedge funds, commodities, private credit, structured products, collectibles, crypto, etc. See Alternative Investment Features, Methods, and Structures

Section 3: Comparing Outcomes — Efficiency vs. Behavior

This side-by-side comparison shows real-world portfolios are often:

Missing even 1–2% annually can mean 25–50% less wealth after 30 years. See supplemental info at the end.

Section 4: Tradeoffs and Real-World Constraints

Section 4.1: Why People Deviate from the Optimal

  • Access: Private investments often require accreditation or high minimums
  • Liquidity: Lower-tier investors keep more cash for emergencies and family needs
  • Psychology: Homeownership and cash feel “safe”
  • Behavior/Education: Peer mimicry and outdated habits
  • Lifestyle: Desire to spend for a better current lifestyle

Section 4.2: Reconciling High-Net-Worth Allocations

SmartAsset data shows that high-net-worth and ultra-high-net-worth (UHNW) investors allocate their portfolios quite differently from the average investor — particularly with lower allocations to cash and bonds, and significantly higher allocations to alternatives (in their definition, private equity is included in this bucket)

Asset Allocation Ultra-High Net Worth (> $30M) High Net Worth (~$1M portfolio)
Cash 10% 2%
Alternatives 46% 22%
Fixed Income 15% 33%
International Equities 9% 15%
Domestic Equities 20% 28%

This allocation contrasts with typical public portfolio advice, which often overweights cash or bonds and underweights alternative investments.

📌 Key Insight: As net worth increases, investors tend to reduce their exposure to cash and fixed income while significantly increasing their allocation to private equity and alternatives.

Further support for this trend comes from academic research. See FMG Discussion Paper 885, page 50, which documents that allocations to private equity and alternatives increase substantially with wealth. The authors note that the bigger advantage of the access to these investments is increased diversification rather than the individual returns from them.

These preferences may reflect not only higher return expectations, but also notable tax advantages — including:

💡 Bottom Line: Ultra-wealthy investors may achieve higher after-tax, risk-adjusted returns thanks to both access and tax-efficient structures.

This suggests:

  • Institutional and UHNW portfolios may be better aligned with long-term wealth creation
  • Return assumptions for higher-net-worth tiers in Section 1 may be understated due to compounding benefits from alternatives and tax optimization

Section 4.3: How to Access Private Equity and Alternative Investments

While alternatives and private equity can improve portfolio returns, they often come with barriers to entry such as wealth thresholds, limited liquidity, and high fees.

Accredited Investor Requirements:

To access most private funds, U.S. investors must qualify as accredited, which means:

  • Net worth over $1 million (excluding primary residence), or
  • Income over $200,000 individually ($300,000 with spouse) for the past two years with expectation to continue.

For those not yet accredited, here are lower-barrier ways to access private market exposure:

⚠️ Important Note: Many of these options involve higher fees, illiquidity, and greater risk. Alternatives may also have complex tax reporting and may not be suitable for every investor. Investors such as Warren Buffett and Charlie Munger criticize private equity firms’ practices, calling attention to transparency and accountability concerns.

I will cover other forms of alternatives — such as crypto and gold — in a future post.

Section 5: How Personal Circumstances Affect Allocation

Individual differences matter:

  • Family size and dependents
  • Homeownership vs. renting
  • Debt obligations
  • Variable vs. stable income
  • Health needs
  • Time horizon

No strategy fits everyone — these need to be factored into any plan. Life circumstances, choices, and constraints can strongly impact risk-taking and ability to achieve optimal outcomes in wealth.

Section 6: Real-Life Case Studies

Case Study 1: The Typical Moderate Wealth Investor — (anonymous)

  • Profile:
    • Age: 40
    • Net Worth: ~$500,000
    • Investment Style: Conservative, focused on stability
  • Allocation:
    • Equities (Domestic & International): 40%
    • Bonds / Cash: 40%
    • Real Estate: 15%
    • Alternatives / Private Equity: 5%
  • Outcome: Moderate portfolio growth with lower volatility, but limited upside due to conservative allocation.
  • Source: Based on aggregated data from Vanguard’s “How America Invests” and personal finance case studies.

Case Study 2: High-Risk, Wealthy Investor (Bill Perkins)

  • Allocation:
    • He does not specify exact numbers, but he mentions heavy allocations to private equity and alternatives.
  • Outcome: Strong portfolio growth driven by significant exposure to high-return private equity and alternative investments. He is also comfortable with taking high risks and heavy losses.
  • Examples below:
  • Bill Perkins: “Spend Your Money NOW – Before It’s Too Late!” - discusses high allocation to private equity and businesses
  • Interview with Bill Perkins on Brandon Adams Podcast – In this interview, Perkins shares insights on risk-taking, asset allocation, and balancing wealth with purposeful spending. He mentions wine as an example of alternative investing.

Conclusion

Portfolio allocation is not only about optimizing for returns, but also optimizing for risk-benefit which is why diversification is so important. With that in mind, some strategies to build wealth can include:

  • Reassess allocation by tier and goals
  • Prioritize higher-return assets over “safe” ones (if able to take higher risks and research)
  • Discuss how to invest in the nontraditional assets like private equity and alternatives with those who are well-educated and successful with these investments
  • Gradually shift allocations as access improves
  • Consider practical advice from experts to max performance with less hassle (I’ll provide examples in follow-up blogs)

This blog is also providing more of a basis for why the wealthy can get even more wealthy faster than others - they have much more ability to take risks, tools, and access points for different investments at their disposal.

Update: this is another perspective on how the wealthy people allocate their money which is largely consistent with this blog. Interestingly this video emphasizes the diversification advantages from access, but also proposes that much simpler strategies can be implemented for similar results.

YouTube Video

Some simpler strategies are discussed below, and I will have more follow-up blogs to be more comprehensive:

Disclaimer

This article was generated in collaboration with ChatGPT and based on publicly available data and academic frameworks. The results generated for what typical investors do needs to be verified but you can use these numbers as guidelines. Same goes for what more “optimal” allocations might be. Consult a licensed advisor before making financial decisions.

I do not currently follow the proposed optimized allocation strategy and am continuing to evaluate and test ideas. For example, I’m still exploring private equity access before committing larger stakes. Market conditions can change, and recent PE returns have softened. You can model your own scenarios using my financial simulator.

Unfortunately, some links may not work without creating accounts or passing paywalls — I’m working to improve this!

References and Food for Thought

Supplemental Information: Wealth Growth Comparison Over Time

Assumptions

  • Initial investment: $100,000
  • Annual contributions: $10,000
  • Returns: Use estimated returns from actual and recommended allocations
  • Compounding annually, contributions at year-end
  • No taxes, fees, or withdrawals

Estimated Wealth Growth Comparison

Time Horizon Actual Allocation Return Future Value (Actual) Recommended Allocation Return Future Value (Recommended) Difference ($) Difference (%)
10 years 5.5% $244,113 6.5% $261,742 $17,629 7.2%
20 years 5.5% $505,946 6.5% $582,097 $76,151 15.1%
30 years 5.5% $919,613 6.5% $1,196,256 $276,643 30.1%

Interpretation

  • Even a 1% annual return difference compounds significantly over time.
  • The longer the horizon, the more critical it is to adopt allocations with higher expected returns.