Asset Allocation and Why It Is So Important
As a high net worth individual, your investments and portfolio will make up a big part of your wealth and financial plan. Your estate planning, as well as retirement planning, will depend on your investments. Additionally, your investments will affect your taxes, and you will have to develop a risk management plan as well. Consequently, your asset allocation strategy forms a significant part of your investment strategy.
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Therefore, if you want to ensure successful estate and retirement plans, you need to have an optimized asset allocation strategy. This is easier said than done. Only the best and most experienced financial advisors can help you formulate such a strategy, and if you have $10 million or more in liquid assets, you should check out this guide on choosing the best financial advisor for yourself.
You can also reach out to Pillar Wealth Management directly. We are an independent wealth management firm that deals exclusively with high net worth individuals and ultra-high net worth families with $5 million to $500 million in liquid assets.
We offer a range of financial and advisory services, such as investment management, risk management, tax management, estate planning, retirement planning, accounting, and much more.Our experienced and dedicated wealth managers and advisors are committed to helping our affluent clients achieve all their financial goals and attain financial security and success. Reach out to Pillar Wealth Management to talk about your financial goals and financial security.
In this blog, we’ll be discussing what fixed asset allocation is, why it is so important, what this allocation should be, different asset allocation strategies, and how to find the right financial advisor for asset allocation. Let’s begin.
What is Fixed Asset Allocation?
If you have $5 million to $500 million in liquid assets, and more importantly, you want to retain them throughout your life, you can’t just keep them in your account forever.
If you want your wealth to last you throughout your retirement and perhaps till your beneficiaries’ retirement as well, you need to grow your wealth as well. And the way to do this is through smart investments and portfolios. There are various investment opportunities out there with numerous kinds of assets. How you divide your wealth across these different assets is your asset allocation.
Why is Asset Allocation so Important?
Your asset allocation strategy is the biggest factor determining the success and performance of your investment portfolios. Asset allocation can have a significant impact on how your investments grow and perform over time. As a result, it can affect how quickly you can achieve your goals, reduce risks associated with your investments, and manage investment costs and expenses.
Here’s what you need to know about it.
Achieving Short and Long-Term Goals
As a high net worth individual, you must have several short-term as well as long-term, and financial and personal goals. All these goals will, to some degree, depend on your investment strategy and, more specifically, your asset allocation strategy.
Therefore, if you want to meet those goals as quickly as possible, you need the right asset allocation strategy for it. For instance, if you have a short-term goal of buying a car, you might need to allocate your assets in such a way to give you quick and high returns. Similarly, if your goal is to simply save for retirement, you might invest in assets that will grow and give profitable returns over time.
This is another reason why asset allocation is so important for ultra-high net worth individuals as it can be adjusted according to your life goals and where you are in life. Your asset allocation strategy in your 20s will be entirely different from your strategy in your 50s. As you grow old, as your family grows, as your financial situation changes, as your circumstances change, as the market changes, you might also change your asset allocation.
As your financial advisor will probably suggest, you must change your asset allocation as other factors change. If your financial advisor suggests you keep the same asset allocation for the rest of your life, you might be heading towards a retirement full of uncertainty. Read about the other signs that indicate your financial advisor is not right for you from this eye-opening guide.
Asset allocation is also extremely important for risk management. The market can be incredibly volatile and impossible to predict at times. This can mean a lot of disaster for your investments. A lot of high-net-worth individuals or even entire ultra-high net worth families find themselves bankrupt due to sudden market changes and volatility.
That’s why you need asset allocation to help diversify your assets across different types of assets and minimize your losses in case of any market volatility. Moreover, you also need an experienced financial advisor for this, such as those you can find at Pillar Wealth Management.
At Pillar Wealth Management, our financial advisors use more than 100 years of market data as well as smart forecasting techniques to curate the ideal asset allocation strategy that can withstand several market conditions while keeping your investments safe. Learn more about it by getting in touch with our wealth managers today.
Only an optimized asset allocation can bear market fluctuations without throwing you for excessive losses. Read our book, The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies for Families Worth $25 million to $500 million, to learn more about protecting your wealth.
All financial actions result in some costs and expenses, usually in the form of taxes. Taxes can be a drain on your wealth, and that’s why when you’re formulating your investment strategy, you need to think of its impact on your costs as well. Certain asset allocations can result in a big tax bill, which can affect your income and wealth.
However, with an optimized asset allocation, you can balance high profits against low costs. Even if it’s not taxes, investments do suffer some losses. It’s your job to somehow minimize those losses, and the way to do that is through optimized and balanced asset allocation.
Choosing the best asset allocation
Asset classes are groups of similar investments. An investment strategy includes defining the best way to allocate assets to the various asset classes, depending on the investor’s financial situation. Asset classes are often chosen for their ability to provide good returns. Since some asset classes are less risky while providing lesser returns, with other classes acting in the reverse, it’s important to diversify your asset allocation to minimize your risk and maximize earnings.
For example, according to a Vanguard study, an allocation comprised of 100% stocks provided an average annualized return of 10.2% between 1926 and 2019, with 25 years seeing losses during that period.
The most commonly known asset classes are stocks, bonds, and cash (or cash equivalents). Other classes include funds, fixed-income securities, and alternatives (e.g., real estate, hedge funds, and derivatives).
There are different types of asset allocation strategies. For example, a strategic allocation combines assets based on their expected rate of return for each asset class, whereas a tactical asset allocation makes short-term deviations from the mix to benefit from unusual market conditions.
Choosing an asset allocation means assigning your investable assets to different classes; for example, you decide to invest 50% of your money in bonds and 30% in stocks and keep 20% in cash. Allocating more assets to bonds indicates a conservative portfolio, and a focus on stocks is considered a more aggressive approach. Stocks tend to earn more, but when stocks are down, bonds generally go up. So, when you need more liquidity, sell bonds rather than stocks.
As conditions change, you may want to modify your asset allocation. So, how do you choose the best asset allocation?
Factors to consider in asset allocation—
These factors work together in their effect on asset allocation.
Achieving your goals effectively and efficiently depends in part on your asset allocation. Your goals can be qualified as short- and long-term goals and some in between.
Buying a car or going on a long vacation next year would be a short-term goal. Short-term goals are best met with cash. Reaching a mid-range goal might be buying a second home, which would benefit from an aggressive allocation in stocks and funds.
Finally, building your retirement nest egg would benefit from an aggressive portfolio when you’re young and more conservative investments as you approach retirement age, while maintaining some room for growth in securities.
As you can see from the above examples, your goals are often tied to age. Some of your goals will change, so your asset allocation will also change. Basically, as you age, the number of years during which you can play the market is reduced.
Your risk tolerance can also change over time, along with your goals. Your risk tolerance may be higher when you’re young and have lots of time to recoup losses. On the other hand, you may be someone who prefers to be safe even over long periods.
Therefore, you can change your asset allocation as your risk tolerance changes or your goals change.
But remember not to watch your stocks going up and down every day! All else being equal, a quarterly review of asset allocation is adequate.
Asset Allocation Strategies
Now, you might be wondering, “what is an optimized asset allocation, and what should my asset allocation be?” The answer to this isn’t simple because what might work for you might not work for someone else. An optimized asset allocation is optimized according to every individual’s wealth, goals, market conditions, and many other factors.
However, here are some of the asset allocation strategies you can think about and discuss with your financial advisor.
Investing in Alternative Assets
High net worth individuals with $5 million to $500 million in liquid assets usually assume stocks and bonds to be the best assets to invest in. While these definitely have their benefits, they carry a lot of risks as well. That’s why it’s a good idea to invest in alternative assets as well to diversify your portfolio and spread out your risk. Other assets that you could include in your investment portfolio are:
– Real estate
– Hedge funds
– Private equity
– Tangible assets
These assets can also help you obtain high returns on your investments, helping you grow your wealth and attain financial security.
Allocating Assets in Private Market
Another area you can consider is the private market. Public market investing comes with its share of advantages and disadvantages. However, the private market can also be quite beneficial for high net worth as well as ultra-high net worth individuals.
Private markets tend to be smaller, and therefore, they have much lesser competition as well. They also hold a lot of growth opportunity, so if you want to grow your wealth sustainably while also protecting it, private markets are a great place to invest in.
When you are devising an asset allocation strategy, it is extremely important to think about long-term investing as well rather than just going after short-term returns. One of the biggest mistakes we see affluent individuals make in their investment and asset allocation strategy is to focus on active money management.
This investment approach focuses on short-term capital gains. However, what’s worse is the strategy behind it. Most financial advisors or managers who adopt an active money management style, work by timing the market and simply investing in the hot buys and latest trends. Even if it helps you obtain high returns in the short-term, in the long-term, this investment approach can be quite costly with high tax bills and high risks.
Alternatively, you should focus on a combination of active and passive money management. Passive money management focuses on the market index and invests accordingly. This leads to much lower internal costs, lower risks, and better returns in the long run. Learn more about why this combination is so important from our handy guide on portfolio growth strategies.
At Pillar Wealth Management, our wealth managers are trained and experienced in formulating the ideal combination of active and passive money management that results in the best returns with the lowest costs for our clients. Schedule a no-obligation chat with us to talk more about your investment strategy.
How to Find the Right Financial Advisor for Asset Allocation?
Unless you hold extensive experience in investing and asset allocation, or even if you do, you might not have the time or skills to formulate, adjust and execute the optimized asset allocation strategies for your wealth.
That’s why you need a financial advisor, the right financial advisors, who will understand your needs and goals and suggest the most appropriate asset allocation to help achieve all your targets. Here’s what you need to look for.
Credentials: Check the financial advisor’s credentials and certificates to ensure that they have the proper training and licenses to advise you regarding your investment matters. While you’re at it, you can do a complete background check to see if they are legitimate.
Experience: Experience also matters a lot. Even if they have all the right certificates and training, there is certain knowledge that is only acquired through experience. Therefore, you don’t want someone who’s been in the field for just two months handling your $5 million to $500 million worth of liquid assets.
Minimum Asset Requirement: The minimum asset requirement will help determine whether that financial advisor is well-experienced in handling high net worth clients specifically. Ideally, you should work with only those financial advisors that offer services exclusively to clients with $1 million or more in assets.
Client Reviews: Rather than focusing on how many clients they have had, you should see what their clients are saying about their services. This will give you a much closer look into the type and quality of services they offer.
Standard of Care: Most importantly, you need to check their standard of care. You should always go for fiduciary financial advisors as they are wholly committed to helping you meet all your goals without any conflicts of interest.
With the right manager or financial advisor on your side, you will be able to make sure your wealth and investments are always protected from market fluctuations and maximize your portfolio performance to attain financial prosperity and security. Learn more about portfolio performance and how you can maximize it from our comprehensive guide here.
Pillar Wealth Management holds more than 30 years of experience in this industry, helping various high net worth clients in meeting their short and long-term financial goals. Our wealth managers and financial advisors work closely with our affluent clients to understand their unique financial situation and formulate customized solutions accordingly. Schedule an obligation-free meeting with us today to discuss your optimized asset allocation strategy.
Frequently Asked Questions
For example, you could have 60% of your assets in stocks, 30% in bonds, and 20% in cash or cash equivalents. A traditional allocation is a 60/40 split between stocks and bonds.
A 70/30 allocation combines a 70% stock allocation with 30% in bonds and other fixed-income instruments.
Asset classes include cash and cash equivalents, stocks or equities, bonds or other fixed-income vehicles, real estate, and alternatives.
Choosing the right asset allocation strategy allows you to balance return on investment with risk tolerance and the lifespan of each investment in the mix.
A good asset allocation is diversified, combining investments to achieve the investor’s short- and long-term income goals, while accounting for risk tolerance and the duration of each investment.
A typical asset allocation strategy is to diversify assets, from low to high risk, so that they provided the total return you need over time.
Asset allocation is affected by your goals, your level of risk tolerance, and the time horizon for the investments.
Asset allocation is important because it introduces enough risk to grow your investments at a rate that allows you to meet your goals, and it spreads the risk across asset classes.
Start by defining your goals; time in the market is important, so don’t juggle your investments in the short term; diversify your assets.
Your portfolio should have a 12-month emergency fund (invested in CDs or treasury bills); invest 80% in a diversified equity portfolio, without concentrating on any theme or sector, and invest 20% in gold.
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We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.
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