As the U.S. experienced inflation, and the bullish stock market increased the overall net worth of many households that may have been considered middle-income pre-pandemic, the rules of investing have also changed.
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The Securities and Exchange Commission enables protections to prevent people from investing in private securities, which include investments through hedge funds, private equity and venture capital. To quality, an individual or household must earn $200,000 annually ($300 for married couples) or have a net worth of at least $1 million, not counting equity in their first home. These people may then be considered “accredited investors.”
These limits set by the SEC ensures that people who cannot afford to lose money in risky investments are protected. In 2019, only 13% of households met one of these benchmarks. In the 1980s, when the thresholds were set, only 1.8% of households qualified. These requirements for accreditation haven’t changed since then.
As a result of inflation, in 2022, 18.5% of households now quality for accredited investor status. If the standards had been adjusted for inflation, a household would need a net worth of roughly $3 million or combined income for married couples of $911,352, according to CNBC.com.
Should You Invest Privately?
Private equity investments tend to have a higher return than the S&P 500, according to a report published by Michael Cembalest, chair of market and investment strategy for J.P. Morgan Asset & Wealth Management.
Some people say that these opportunities for wealth generation should be available to more Americans. But it’s important to realize that with higher returns come higher risk.
“Without information, you have no ability to value the company to make an informed investment decision… You’re investing blind,” Micah Hauptman, director of investor protection at the Consumer Federation of America told CNBC.com.
Private investments also tend to be less liquid, which means you may not have access to your money in an emergency. For wealthier Americans with plenty of access to cash flow, this may not be a problem. But in states like Hawaii, California, and New York, where you need more than $100,000 in annual income to earn a living wage, meeting that income tier of $200,000 may not provide the level of financial security you need to make risky investments.
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Even if you qualify to become an accredited investor, you may not choose to take advantage of the opportunities available. It’s smart to speak with a financial advisor who can help you analyze your unique situation to determine if private equity investments are worth the risk.
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This article originally appeared on GOBankingRates.com: Private Investments Used To Be Reserved for the Ultra-Rich, Now 1 in 5 Households Can Buy Them: Should You?