In order to understand what high net worth investing is, you need to understand what a high net worth individual (HNWI) is.
A high net worth individual, as the name suggests, is a wealthy individual with at least $1 million in liquid financial assets.
In the financial industry, the high net worth status is based on how a bank wishes to classify its clients.
There are two characteristics that classify you as a high net worth individual:
Having considerable liquid assets.
Having many investable assets.
As wealth accumulation increased and more and more people have become HNWI, a new class of wealthy people has been created, namely the ultra-high net worth individuals.
An ultra-high net worth individual (UHNWI) is someone with at least $30 million in liquid assets.
Now that you understand what it means to be an HNWI or UHNWI, let’s learn some high net worth investing strategies used by HNWI.
How Do High Net Worth Investors Invest?
Imagine if you could use the same investment principles as the high net worth individuals.
The high net worth investors have a large amount of capital available for investing.
So, how do high net worth families invest their capital?
The traditional asset allocation model for high net investors is 60/40:
40% Fixed Income (bonds)
This asset allocation model provides a diversified and more balanced source of income. While it is a rule of thumb, it is still very useful. Equities will pay investors dividends, while bonds will pay investor interest.
This can be considered a form of passive investing.
These types of investing strategies for the high net worth investor will also benefit from stock price appreciation. At the same time, bonds offer stability and income predictability.
The traditional asset allocation model of 60/40 served investors very well in the 80s and 90s, during a time when interest rates were much higher.
Today, bond yields are at the all-time record low, so the traditional asset allocation model won’t work that well in the current environment.
So, it’s necessary to adopt different high net worth strategies.
And, that’s exactly what we’re going to discuss below:
Investing Strategies for High Net Worth Investor.
The high net worth investors are the type of people who know what to do if someone gives them $1 million.
Ask yourself this question:
If you were to inherit today $1 million, would you spend the money?
Or, would you invest the $1 million?
If you’re not going to spend the money, then where should you invest $1 million right now?
Well, the first step is to search for the best brokers for fixed income trading for high net worth and start from there.
You should also diversify your investments and seek opportunities that have enhanced return potential and favorable tax treatment.
Currently, many traders are realizing the old asset allocation model is changing. Instead of using the broken 60/40 asset allocation model, traders are becoming a bit more creative and are currently experimenting with new approaches.
With the new approach, the high net worth individuals are able to diversify their investment beyond the standard stocks and bond model.
Here is an investing strategy for the high net worth investor that includes attractive alternatives.
High Net worth Strategies #1: Asset Allocation Strategies
Asset allocation is the process of deciding how much of each asset class (equities, bonds, real estate and cash) you should hold in your portfolio. There is no optimal asset allocation model as it all falls back on the money managers’ ability to seize attractive risk-adjusted return opportunities.
For example, a typical high net worth asset allocation model looks something like this:
10% private equity
10% real estate
10% hedge funds
10% fixed income
The time horizon of this type of asset allocation model is much bigger. This type of investment is typically held for years.
Nowadays, the Capital Asset Pricing Model (CAPM) is widely used to quantify the correlation between risk and the expected return. As the Harvard Business Review explains, CAPM sees risk and return as being decided by a portfolio exposure to market beta.
Check out HERE what is Beta in trading.
By combining the US stocks and global stocks into a portfolio, this will improve the risk and return relative to each of the stock selection. Compared to stocks, bonds are less risky, but they have lower expected returns.
However, most stock model portfolios work well if they include growth stocks, which bring us to the next investing strategies for the high net worth investor.
High Net worth Strategies #2: Growth Stocks
Buying and holding growth stocks is a form of passive investing favored by the high net worth individuals.
For example, if an investor has invested in Amazon stock back in 2015, the investor would have increased the investment by more than 700% by mid-2020.
Growth stocks may or may not offer dividends (the certainly offer fewer dividends than blue-chip stocks), but they remain attractive because they produce returns through share price appreciation. Growth stocks also come with tax advantages because the investor is not obligated to pay taxes while holding the stock. Additionally, if you hold the stock for more than one year, your gains are taxed as long-term capital gains.
The long-term capital gains are taxed at a lower rate than the short-term capital gains.
We’re going to outline additional strategies for establishing asset allocation.
More Investing Strategies for High Net worth Investor.
If you want to achieve to optimize asset allocation and minimize risk, you need to look into the different approaches that high net worth individuals use.
We’re going to summarize for you five of the most common asset allocation strategies used by HNWI:
1 - Strategic asset allocation adheres to a proportional combination of assets based on expected rates of return. For example, if stocks historically returned 15% per year and bonds have returned only 5%, you would put more weight on stocks.
2 - Constant-weighing asset allocation strategy – with this approach you constantly adjust your portfolio. For example, if stocks would drop in value, you would buy more at a cheaper price.
3 - Tactical asset allocation – helps HNWI to take advantage of exceptional short-term investment opportunities. This is a type of active trading strategy.
4 - Dynamic asset allocation – this is another type of active trading strategy that helps you adjust your portfolio as markets rise and fall. For example, if the stock market is showing weakness or the economy is entering a recession, you sell stocks in anticipation of a drop in the stock price.
5 - Insured asset allocation – this approach is more suitable for the risk-averse investor because it seeks to protect the portfolio value by not allowing it to drop below a certain threshold.
That pretty much sums up how the wealthy stay wealthy and can become even wealthier.
The bottom line is that asset allocation is not an exact science and it all depends on your financial goals and experience.
What you can do as a small investor is to diversify your portfolio. While you might not have the money to buy real estate and a good amount of stocks, you can seek alternative investments.
For example, you can trade stocks, ETFs, currencies and another part of your money to be allocated to cryptocurrencies.
Let’s now see how the ultra-rich invest their money. Are ultra-high net worth strategies different from high net worth strategies? Generally, they are similar, but there are still a few important details to pay attention to.
Ultra-High Net Worth Investment Strategies.
A new breed of investors evolved among high net worth individuals and these are the ultra-high net worth investors. As explained above, UHWIs are defined as having investable assets of at least $30 million.
So, where do the ultra-rich invest their money?
According to the Wealth Report Attitudes Survey 2020 (see figure below) the UHNWI asset allocation model is more diversified. The Wealth Report revealed that the average UHNWI investment portfolio was invested in each asset class as follows:
27% in real estate.
23% in equities.
17% in bonds and fixed income.
11% in cash (currencies).
8% in private equity.
5% in collectibles (including art, antiques, and other expensive items).
3% in gold and precious metals.
1% in cryptocurrencies ( Bitcoin and altcoins).
We can note that there is an increased interest in investing in the long-term, which is the case for real estate investments.
Additionally, you can see that 11% of the wealth is held in cash, which means UHNWIs are active in the forex market as well. Currency trading for high net worth individuals is again done over the long term.
Now, how the average investor can invest like a billionaire?
Ray Dalio an American hedge fund manager said:
“It’s more difficult to succeed in the markets than it’s to succeed in the Olympics”
For more trading quotes, please see Top Trading Quotes of all Time.
While everyone is saying it’s difficult to succeed in the markets, it’s not impossible.
And, trading like a billionaire is a different ball game altogether.
If you want to replicate the ultra-high net worth investment strategies and be a billionaire someday, these are the 10 things you should be doing:
1. Invest only in what you know.
2. Understand the difference between price versus value. When the price is well below the stock value than it’s the best time to buy a stock.
3. Identify cheap investments (e.g. high net worth cryptocurrency trading).
4. Invest in durable time tested businesses.
5. Research the team management team behind a company.
6. “Be fearful when others are greedy and greedy when others are fearful” from Warren Buffett wisdom.
7. Develop a long-term mindset.
8. Invest in Warren Buffett’s Berkshire Hathaway stock, which has outperformed the S&P 500 for decades.
9. Invest in overseas stocks.
These investing principles can help you invest your $10,000 like an ultra-high net worth investor.
Final Words – High Net Worth Strategies
In summary, when you’re a high net worth investor managing your wealth can be a challenge. The HNWI don’t invest like the average investor, they use ultra-high net worth investment strategies to accumulate more wealth.
The investing strategies for the high net worth investor that have produced the most profits are the ones that are sufficiently diversified. Diversification is key to how wealthy people preserve their wealth and accumulate more wealth.
You can too invest like a wealthy person if you start using the principles outlined through this high net worth strategies guide.
Thank you for reading!