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August 5, 2014

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8/01/2014 @ 1:44PMRob Russell, ContributorMarket Correction? How The Rich Are Investing NowAccording to a recent report by Tiger 21, North America’s premier peer-to-peer learning network for high net worth investors with a collective $25 billion in assets, wealthier investors have shifted their investment allocations this year and it may be wise for you to listen and learn what they’re doing especially because of the amazing volatility we’ve seen in the markets recently.Contrary to what you may expect, wealthy investors have less allocated to stocks than you probably do. Surprisingly, these savvy investors have only 23% in public stocks and they’ve recently increased their allocation to Private Equity which stands at 22%. These high net worth investors are favoring Private Equity (PE) because it can play an important high growth component in a portfolio and more importantly PE tends to not be correlated to the success or failure of the stock market. From my experience, the wealthiest investors enjoy making their balances grow, but they hate losing even more than winning, which is why time and time again the rich get richer even during bad markets‚Ķthey invest better and smarter, and so can you.Any investor, big or small, can get access to public equity (common stocks), but how does the millionaire next door and wannabe millionaires get access to Private Equity investments? It turns out that its not that easy. It’s difficult to invest knee to knee with the big boys because of the high investment minimums (typically $1 million or more per investment), the illiquid nature, and the difficulty of gaining access to Private Equity (hence the name private).Because it’s scarcely attainable for investors who don’t have $25 million or more to invest in pure PE, the next best thing may be to invest in Private Equity companies. There are only a handful of ways to accomplish this:1) Buy Private Equity Company StocksSeveral of the most successful and well-known PE firms have taken themselves public in recent years. In my opinion, some of the best managed are The Carlyle Group, KKR & Co., Apollo Group APOL -0.07%, and the Blackstone Group.2) Buy A Private Equity FundCan’t decide which PE common stocks to buy? There’s an ETF for just such an occasion. PSP by PowerShares holds a basket of PE company stocks and currently sports a pretty sweet dividend of around 11%, but be aware of the hefty price tag of 2.19% per year.3) Work With An Advisor Who Specializes In Higher Net WorthSome select advisors, like our firm, specialize in higher net worth investors like a cardiologist specializes in heart patients. Because of this focus, elite advisors may offer you access to more pure PE investments as long as you meet their minimum investment, which can vary greatly. The right advisor can help guide you into the right PE investments and make sure you have a proper allocation and prudent risk level. When interviewing advisors ask them what type of client they specialize in and ask for proof of their experience.Above and beyond the wisdom shared by the Tiger 21group on their increased PE allocation, I think the key takeaway from this report is the level of diversification that the “smart money” uses. Their largest allocations are: 23% in public equities, 22% in private equity, 22% in real estate, 14% in fixed income, 11% in cash, and 6% in hedge funds. Notice that some of the wealthiest investors around do not have a lot of their money in buy, hope, and pray mutual funds (if any), instead they allocate their money among investments that are not correlated to each other, where the fate of their fortune is not tied to the market always going up. This is something all investors, big and small, should take notice of, especially during this suspiciously all-time high stock market.Disclosure: Rob Russell offers advisory services through Centum Capital Advisors LLC, an independent RIA.