High-Net-Worth Individuals Asset Allocation Breakdown
Today, the term millionaire has been replaced by a new term – high-net-worth individuals (HWNIs). An HNWI is a person who has a minimum of $1 million in liquid assets. Liquid assets only refer to money held in banks or brokerage accounts and exclude assets like collectibles, durable goods, and primary residence. This category of wealthy individuals can be further distinguished into three classifications – high-net-worth individuals (HNWIs) with an asset balance between $1 million and $5 million, Very-high-net-worth individuals (VHNWIs) with an asset balance between $5 million and $30 million, and ultra-high-net-worth individuals (UHNWIs) with an asset balance of more than $30 million in liquid assets.
According to a recent study, in 2020, more than 11.6 million American households had a net worth between $1 million and $5 million. This figure was 5.5% higher than the previous year. The same study reported that UHNWIs in America grew by 21.3% to a total of 1.8 million households. Even though the number of HNWIs and UNHWIs are rising in America, there is still a large population that is below this threshold. Achieving the level of an HNWI is advisable for people who want to live a financially secure retirement. Financial experts recommend that an average retiree should have at least $1 million as retirement savings to live a comfortable life ahead.
However, while everyone dreams of becoming an HNWI, the journey to reach the milestone requires an effective strategy with the right investments. It is important to understand high and ultra-high-net-worth asset allocation and assess what type of investments you can make to achieve the target financial milestone. For example, while you may think that HNWIs and UHNWIs have access to wider investment opportunities than an average investor, such as expensive paintings, vintage cars, equity in private companies, expensive wine, real estate, and more, as the data suggests, the asset allocation for high-net-worth individuals’ lays 26% in alternative investments, a class of asset accessible and available even for an average investor. However, according to a recent survey, alternative assets only form 5% of the average investor’s portfolio. Therefore, as an investor, you may consider decoding a high-net-worth individual’s asset allocation and aim to create a portfolio that closely mimics theirs, while still aligning with your risk tolerance and financial goals. To do so, you can also consult with a professional financial advisor who can guide you on the same.
Here is an in-depth breakdown of an HNWIs asset allocation:
1. Stocks:
The objective of investing in stocks is to generate high returns. If you evaluate the high-net-worth asset allocation, you will find that a majority of their portfolio comprises stock investments. According to a 2020 survey, listed equities comprised 49% of the portfolio of an HNWI. This figure is 6% higher than the mark in 2017 (43%). Alternatively, a UNHWIs asset allocation showed 31% of their portfolio in listed equity investments, 2% higher than in 2017. Another 2018 survey pointed out that HNWIs aged 73 plus also had a high percentage (nearly 61%) of their allocation towards stocks. This is primarily because this age group has experience and understanding of the stock market and knows that staying the course can help them tap the full potential of their stock investments. Having an aggressive stock portfolio might help you generate higher returns, even in a short period. However, you must allocate your money in stocks to a limit that suits your risk appetite. Simply mimicking the stock allocation of HNWIs is not the ideal way to create an average investment portfolio. If you are younger and over 10-15 years away from retirement, you may consider following the 60-40 investment approach, where you place 60% of your funds in stocks and 40% in other assets. You could also use the other method where you subtract your age by 100 and invest the answer in stocks. For instance, if you are 30 years old, you could benefit from investing 70% in stocks. However, the precise investment depends entirely on your financial preference.
2. Fixed-income:
Like the average investor, even an HNWI’s asset allocation and a UHNWI’s asset allocation comprises fixed-income securities, such as government bonds, Treasury bonds and bills, municipal bonds, corporate debentures, pension funds, and more. As reported by the 2020 survey from the global investment firm KKR, HNWIs invested 22% of their assets in fixed-income securities. Even though this percentage is much lower than in 2017 (33%), fixed-income investments still hold a major portfolio share. The objective is to create a diversified portfolio that can potentially generate high returns but also absorb shocks from volatile market events. Fixed-income investments, such as government bonds and corporate bonds, pay a fixed interest, periodically or at maturity. These investments return your principal at maturity. Fixed-income securities add much-needed stability to any portfolio because these securities are less volatile and much less risky than stocks. However, it is not advisable to create a fixed-income heavy portfolio as these securities only generate mediocre returns, unlike stocks that can potentially offer inflation-beating returns. A fixed-income focused portfolio is not an effective hedge against the steeply rising inflation.
3. Alternative investments:
Alternative assets are different from the traditional asset classes of stocks, bonds, or cash. These assets have low or no correlation with traditional asset classes. Alternative investments are not heavily regulated like conventional asset classes and are often complex. Some typical alternative assets include private equity, hedge funds, commodities, currencies, managed futures, contracts, and more. While alternative assets also comprise real estate, art, antiques, etc., these categories are usually one of the first choices for high-net-worth and ultra-high-net-worth individuals. According to a 2020 survey, high-net-worth individual asset allocation includes 26% investment in alternatives as compared to 22% in 2017. In the case of ultra-high-net-worth asset allocation, alternative assets comprise 50% of their portfolio. 72% of HNWIs have invested in cryptocurrency, a new-age alternative asset option. According to another study, the total alternative assets under management might likely reach $17.2 trillion by 2025, a 320% increase from the $4.1 trillion in 2010. If you have enough savings, you can also consider investing in real estate that may likely offer higher returns if you stay invested for the long course. Alternative investments are a wise choice for even an average investor since these assets work in contrast to traditional asset classes. Hence, if the stock market has hit a low, chances are property prices, specific commodities like gold and high-value currencies will probably benefit in the same situation. The returns from alternative assets may allow your portfolio to recover the loss of stock investments if any. In another scenario, alternative asset class returns can help you accumulate significant wealth in the long run. Investing in alternative assets like gold, oil, and real estate can help you effectively hedge against inflation. However, these assets have low liquidity and are not regulated like traditional asset classes. Further, you might need a high minimum balance to invest in alternative assets, especially gold, real estate, etc. Even though alternative assets were primarily aimed at institutional and accredited investors, they have now become feasible to retail investors through alternative funds, such as exchange-traded funds (ETFs) and alternative mutual funds. These alternative funds provide ample investment opportunity, which was previously difficult and costly for an average investor. Further, unlike direct alternative assets, alternative funds are publicly traded and regulated by the SEC (Securities and Exchange Commission), specifically the Investment Company Act, 1940.
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4. Cash and cash equivalents:
If you analyze the asset allocation breakdown of high-net-worth and ultra-high-net-worth individuals, you will see that even though stocks, bonds, and alternatives form a majority of their portfolio, they do not completely neglect cash and cash equivalents. As per a 2020 survey, ultra-high-net-worth individuals maintain 9% of their portfolio as cash and cash equivalents. In contrast, high-net-worth individuals invest only 2% of their portfolio in cash and cash equivalents. Cash and cash equivalent investments are important for your portfolio because they bring liquidity and easy access to funds. You can secure a portion of your portfolio in cash and cash equivalents to ensure you have ready access to funds, if required, in case of events like a medical emergency, unemployment, salary cut, etc. However, cash and cash equivalents do not generate any note-worthy investment returns. Hence, such investments can be a small part of your broad portfolio rather than consuming a large share. Ideally, you can reserve 2-3% of your portfolio in this form of investment. Alternatively, you could also use cash and cash equivalents to create an emergency reserve for your future unexpected needs.
5. Other assets:
Apart from stocks, bonds, alternative assets, and cash, high-net-worth asset allocation and ultra-high-net-worth asset allocation also include items, such as rare whisky, classic cars, handbags, etc. According to a report, the value of these luxury items has risen by over 129% in the last ten years. Specifically, rare whisky has witnessed an explosive growth of over 478% in the same period. However, the COVID-19 pandemic affected the growth of these luxury goods because of the supply chain issues and restrictions in normal mediums of sales and auctions. Even in this period, some specific luxury items like rare whisky and handbags witnessed a steep growth in prices. If you can afford to invest in these unique assets, you can create a portfolio much like an HNWI and UHNWI. However, when investing in these assets, be careful about some aspects. Luxury goods are illiquid and take more time to buy and sell. Moreover, these items are relatively unregulated. There is not much historical data for these, and some of these investments can cost you extra for upkeep and maintenance.
This detailed asset allocation breakdown of HNWI and UHNWI can give you a better understanding of how to structure your portfolio to generate higher returns in the long run. However, as a wise investor, it is not advisable to create an investment portfolio identical to an HNWI or a UHNWI. You can create a portfolio that best aligns with your goal factors, risk tolerance, and time horizon.
Here are some factors that you should consider when creating your portfolio:
1. Financial goals:
As an individual, you have unique aspirations and financial goals that you want to achieve. Your goal could be to save for retirement, your child’s education, buy a house, and more. Different financial goals and desires affect how you invest and risk. For instance, if you want to buy a house, you might consider investing in high-return generating assets like stocks and alternative assets instead of fixed-income securities that focus on the stability of returns rather than growth.
2. Risk tolerance:
Your risk tolerance is the prime factor that should ideally determine the composition of your portfolio. Risk appetite refers to how much money you are willing and able to lose in anticipation of higher returns in the future. For instance, if you are an aggressive, high-risk investor, you can invest your money primarily in high-risk securities like stocks and alternative assets. Alternatively, if you are a risk-averse investor, fixed-income securities will appeal better to your risk profile.
3. Time period:
The time horizon of your investment also governs your asset choices. Time horizon refers to the period for which you are ready to invest. The investment period is significantly influenced by your financial goals and, in turn, impacts your risk tolerance. For instance, if you are close to retirement and want to save for it, your portfolio will typically consist of safe assets like fixed-income securities i.e. bonds. Further, if you have an immediate or a short-term goal, you might not prefer investing in riskier assets like stocks since they are subject to high market volatility.
To summarize
Apart from these critical factors, your monetary ability to invest also affects your portfolio composition. If you have a considerable savings amount, investing in alternative assets like real estate, collectibles, luxury items, etc., can be an option. However, if you have limited funds, it is best to structure your investments per your financial preferences.
Other than adapting the asset allocation breakdown, an average investor should also adopt the financial habits of HNWIs and UHNWIs. By and large, a person achieves the high-net-worth tag because of their financial discipline, consistent investing, and low debt liabilities. Further, these individuals typically start saving and investing at an early age, giving their funds enough time to accumulate significant wealth over time. With financial discipline and the right investment strategies, you can create a high net worth, even if you do not have sufficient financial resources at the moment.
If you feel the investment world is complicated and overwhelming, you can consider consulting a professional financial advisor to help you create a portfolio that best aligns with your financial goals, time horizon, and, most importantly, risk tolerance. Use Paladin Registry’s free advisor match tool and get matched with 1-3 qualified advisors who may be able to help you with your unique financial goals and requirements.
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