High-net-worth-individuals (HNWIs) have access to exclusive investment options that regular investors may not have. The large size of the investible asset HNWIs have opened the doors for them to varied investment vehicles. However, many assume that with access to wealth and a plethora of planners, HNWIs may have smooth navigation with all things finance. In reality, an incredible amount of strategizing, planning, and investment allocation planning goes behind retaining, protecting, and making their wealth. For this reason, it is also highly recommended that HNWIs consult a financial advisor for further assistance in managing their wealth.
In this article, we will explore the different investment options that high-net-worth individuals may consider including as part of their investment portfolio. Some of them are quite common; however, most of them are one-of-a-kind investments that are available exclusively to HNWIs, courtesy of their high entry cost or risk-reward ratio.
But before moving on, let us understand who a high-net-worth individual is.
Who are high-net-worth-individuals?
high-net-worth-individuals (HNWI) is a term used for a group of people who have at least $1 million in liquid assets. The term liquid assets refer to assets that can be easily liquidated, like cash or money in bank accounts. Assets like fine art, residence, estates and businesses are not categorized as liquid assets. Therefore, individuals with liquid assets in the range of $1 million and $5 million qualify as wealthy and are considered as HNWIs. Those with liquid assets beyond that are termed very high-net-worth-individuals, and ones with investible assets of more than $30 million are known as ultra-high-net-worth-individuals (UHNWI).
Asset allocation for HNWIs
Asset allocation is crucial for any investor. However, the scale of funds at stake for a high-net-worth-individual makes asset allocation an additionally complex process. Optimal asset allocation is essential to defy losses and find the right mix of different investment vehicles to keep risk under control. Although high-net-worth-individuals have an increased risk appetite for investing, the right asset allocation combined with frequent portfolio rebalancing and adjustment can be the right strategy for their asset and risk management.
10 Investment options for HNWIs
The most preferred investment option for a lot of high-net-worth individuals is investing in stocks. No one can deny the potential of the stock markets. However, the risk associated with the stock market underlines that all funds cannot be invested in stocks.
So, where do high-net-worth-individuals invest their money to help it grow?
Here are some top investment options for high-net-worth individuals to choose from for wealth protection as well as capital appreciation:
1. Real estate
high-net-worth-individuals with a large pool of money can consider investing in real estate. Not only does real estate provide long-term financial stability and security to the owners, but it can also provide tax benefits to the investor. Real estate is also one of the safer investment choices, given that it is not volatile as the stock market.
Real estate is an asset that, more often than not, appreciates well over time. In addition to this, these properties can also serve as an extra source of income when rented out. Mortgaging, renting, and leasing are excellent options to monetize a property and have extra cash flowing every month. This can also act as a great source of income, especially for those in their retirement, for which the investment to purchase needs to be made during the earning years.
Investors can also enter ‘tenant-in-common ownership’ of the real estate, where you can chip in to buy a small piece of a large property along with other investors. In this case, the paperwork shall be minimal, and you can sell your stake anytime you want! Real estate ‘tenant-in-ownership’ also carries the same tax benefit as any other real estate investment.
2. Government & corporate bonds
Bonds are fixed-income securities that are some of the safest investment options for investors of any scale. For high-net-worth individuals, investing in either government or corporate bonds can be a great way of balancing risk in their investment portfolio since the risk factor with bonds is marginal.
Investors can buy bonds for a specific number of years. While government bonds are sold in multiples of $100, corporate bonds are sold in multiples of $1,000. The best part about investing in bonds, especially for high-net-worth individuals, is that no local or state income tax is levied on the gains made by government bonds. There is only a federal income tax that is imposed on government bonds.
3. Mutual funds
Mutual funds are a fantastic example of making money work for you. Different kinds of mutual funds can help diversify the investment portfolio for high-net-worth individuals based on the time horizon, investment goal, and amount of funds available. For instance, balanced mutual funds can help create wealth while balancing the risk; debt funds can be used to build wealth over the long term.
4. Roth IRAs
As a high-net-worth individual, you are probably already paying a hefty amount of money in taxes to the government. Naturally, you want to look for investment options that not only help build your corpus over time but also prevent tax erosion. This is where Roth IRAs come in. With traditional IRAs and 401(k) accounts, you get a tax rebate when you make the contributions. But it must be noted that the income tax slab rate is applicable when you withdraw the money. The opposite happens with Roth IRA. Before contributing, you pay taxes on the income up-front, let the money grow tax-free, and withdraw the money tax-free.
5. Investment in emerging markets across the world
Adding international investments can also be a way of diversifying the investment portfolio.
The Hong Kong, Singapore, and Japan markets have become mini-financial hubs for the world. Investing in the mature U.S and European stock markets can yield decent returns. However, emerging markets, especially those of China, India, Indonesia have been showing tremendous potential and have been resilient in the face of the pandemic too. HNWI may explore these markets to park some funds, although only after careful research.
Overseas markets present several opportunities for high-net-worth individuals to explore. Apart from the capital gains one can make, there is also the edge one gets with foreign exchange when you invest in international markets. This is probably particularly advantageous to US investors as the USD is considerably strong among other currencies of the world.
Therefore, investments after careful research in these markets may have the potential to enhance wealth over time.
6. Venture capital funds
Countless startups are finding great success, many that have rags to riches stories. Investors who invested in the budding stage have made millions. Some of these startups have also moved on to list on the stock exchange. This has created the opportunity for a separate type of investment that can be allocated to these growth companies. These venture capital funds pool in capital from elite investors to help competent entrepreneurship with start-up capital. Naturally, an enormous corpus would be required for the same, thereby suitable for HNWIs.
When you invest in a venture capital fund, you give money to a fund manager who will carefully choose a startup to invest in. These funds also require years to mature since startups and small companies take time to grow into scale companies. Upon maturity, the investor gets back the capital they invested in addition to the return.
There is no doubt that insurance schemes help secure your finances and act as reassurance if something should happen to you. It will ensure that your loved ones are financially secure and looked after in your absence. However, insurance schemes can also be a great investment tool based on the type of scheme.
This can be used or further invested in other asset classes for added returns. For example, life insurances with lifetime coverage offer payouts at equal tax-free intervals and can act as an added source of income. Similarly, term life insurance provides death benefits that can be as large as your annual earnings to ensure that your family does not stutter financially. And for HNWI, the numbers involved would naturally be large scale.
8. Hedge funds
Hedge funds are an elite asset class restricted to investors with a high liquid net worth. Hedge funds pool in the investors’ money and invest it in securities that are less regulated than others. Although the returns offered are high, the risk is equally high.
Hedge funds use investment tactics including shorting, arbitrage, leveraging, and derivatives like options and futures to capture as much potential as possible from the market. Hedge funds are highly aggressive investment instruments.
Hedge funds generally allow accredited investors to invest, but due to high minimum investment requirements, hedge funds are often out of the average investor’s reach.
9. Private equity
Private equity is a form of private financing using which investors can invest in private companies. Individuals can also invest in private equity firms that may buy out the private company to generate returns.
Since the minimum investment required in private equity is very high, it makes a great investment option for high-net-worth individuals. A huge chunk of high-net-worth-individuals added private equity to their portfolio as an alternative investment in the last five years. The number of investors in the private equity market is slated to grow over the years – thanks to their high capital appreciation value.
Cryptocurrency is taking the world by storm and strongly vying for a position as an asset class in itself. According to a recent study, 72% of HNWIs surveyed have chosen to invest in cryptocurrency as an alternative investment. With the kind of gains we witness as made by Bitcoin, Ethereum, and others, many high-net-worth-individuals are seen stepping into the crypto world.
Many HNWI and UHNWI have started to believe that maybe investing a portion of the portfolio in cryptocurrency as part of retirement savings may be a good idea. Many have become crypto-whales (investors who buy up large chunks of the limited resource and have the power to instigate volatility in the markets when they potentially sell).
With cryptos considered the next big thing, and debatably the future of currency, it is not surprising to see major HNWI funds flowing into the same.
There are ample investment options for high-net-worth individuals in the market. High-net-worth-individuals enjoy the perks of investing in newer investment alternatives like hedge funds, private equity, and venture capital that many ordinary investors cannot enter.
When these investment options are used optimally, they can aid in creating and protecting the wealth for high-net-worth individuals. However, the only catch here is asset allocation and picking the right investment option based on your risk appetite, investment goals, and time horizon. Certified wealth planners and investment advisors can help high-net-worth individuals tread through these waters in the safest way possible and ensure that the investment vehicles chosen for you strategically help you grow your wealth.
Looking to connect with a qualified financial fiduciary or wealth management firm that provides you with customized wealth solutions? Use Paladin Registry’s free advisor match service and get connected with 1-3 vetted advisors who may be able to help you with your specific queries and create a customized financial plan for you.
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