What Is an Accredited Investor?, #138
Over the last year, I’ve heard a lot of buzz about using alternative investments to boost portfolios. However, most people don’t know you need to be an accredited investor to take advantage of these opportunities. On this episode, I’m breaking down alternative investments, how to become an accredited investor, and my personal thoughts on investing outside normal investment accounts.
You will want to hear this episode if you are interested in...
What is an alternative investment? [0:54]
How to qualify as an accredited investor [5:48]
My thoughts on alternative investments [7:33]
Understanding alternative investments
The world of investing is vast. There are tons of things you can put your money into and hope for a quality return. Typically, people invest in what is known as registered investments. These include stocks, bonds, mutual funds, ETFs, and stock options. There are requirements that companies have to go through to register an investment so that investors can perform their own due diligence. Registered investments tend to lack the element of surprise because they have been around for a while, and there is a good deal of information on them.
However, certain non-registered investments are considered alternative investments and may offer greater diversification and returns than traditional investment options. Alternative investments are broken into five main categories: hedge funds, private capital, natural resources, real estate, and infrastructure. Because these investments are much riskier than traditional investments, the government requires you to be an accredited investor before pouring your money into them.
The qualifications of an accredited investor
Why limit who can make alternative investments? Authorities want to make sure that the people buying them are financially stable and experienced. They want to make sure you are informed about the risk involved in these ventures. And if there were to be a loss, they want to ensure it won't be catastrophic. The truth is a complete loss of your money in a private placement is very possible. If you're buying high-quality stocks, mutual funds, or ETFs, you're never going to wake up one day and find out that it has gone to zero. But if you invest in a private placement, there's a strong likelihood that could happen, and your investment could be completely worthless.
However, if high risk and high reward entices your investment dollars, you need to follow these requirements to become an accredited investor. According to Rule 501 of Regulation D issued by the SEC, a person must have an annual income exceeding $200,000 or $300,000 jointly for the last two years to become an accredited investor. They also need the expectation of earning the same or higher income in the current year. Additionally, you can be considered an accredited investor if you have a net worth exceeding $1 million, excluding your primary residence. Listen to this episode for more on becoming an accredited investor!
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