Strategic Asset Allocation for Ultra High Net Worth Individuals

In the long run, concentrating your investments is unwise

Wealth management and strategic asset allocation analysis assumes that roughly every three years we will experience a decline in the stock market and that every five years or so we will see a decline of 20 percent or more. This is reflected in the quarterly updates that wealth managers show clients.

However, when the stock market gets rolling, asset allocation and long-term personal goals are often forgotten when investors start chasing short-term performance.

It becomes a goal to outperform the markets, the neighbors, golf buddies, etc.

If you have a balanced portfolio of equities, fixed income, cash and perhaps some alternative investments, all with low correlation to each other (i.e., they move up and down with little relation to one another), then you cannot outperform the stock market when it is moving up.

Balanced Portfolio

Since a balanced portfolio is purposely designed for lower volatility, it will lose or gain less than the stock market. Keep in mind the reason for balanced portfolios is that investors cannot afford to lose 20 percent or more when the markets take a big hit.

The irony is that investors who abandon long-term asset allocation to chase short-term performance will most likely underperform the original rate of return goal over the full market cycle. This could lead to disastrous results as we illustrated in our article “Calibrating your investment return expectations,” dated Nov. 10. Craig, a colleague in Florida, recently shared this example. He met a retired physician at a dinner party who said that his stockbroker “lost him 60 percent in 2000,” which resulted in huge adjustments to his lifestyle. Later he admitted that he had pushed his broker into moving more and more of his nest egg into the stock market and taking a big sector bet on tech stocks.

Craig asked if, prior to 2000, the doctor had a well-balanced and diversified portfolio and he admitted that he did. Craig then asked if he had stuck with his original plan, would he be better off today. The doctor admitted that his lifestyle would be where it was prior to the market crash if he had not insisted on trying to squeeze every last point out of the great stock market rally of the late 1990s.

But, the good doctor wouldn’t absolve his stockbroker either and we fully agree with his logic. He said the broker did little to persuade him to remain diversified. It seemed clear that the broker acted as a facilitator rather than an adviser.

Investors usually want to fire the money manager within an asset class (international stocks, value stocks, bonds, and growth stocks are asset classes) underperforming the stock market when the market is moving up. Sometimes this is appropriate. Often it is not.

We saw this in 1998 and 1999. Investors were abandoning fixed income (bonds), international stocks (up less than 2 percent in 1997), and whatever else wasn’t keeping up with technology stocks.

This is where the adviser must step up and advise and not just facilitate. The adviser has the advantage of a clear understanding of market cycles and the damage to a portfolio short-term performance focus will probably cause. You should expect no less from your adviser than you would from a cruise ship or plane captain.

Cruise ships and planes can sail, take off and land on their own nowadays. The reason we have experienced captains is to safely navigate through the unexpected yet recurring external events that may occur during our journey.

Your investment journey is no different. Market collapses are unexpected and recurring and you need an experienced captain to help you make smart strategic asset allocation with your portfolio.

Remember, a 50 percent loss means you have to double the leftover portfolio to get back to even. The “magic” of asset allocation is that when stocks do experience down phases, the other asset classes that are rising or flat will buoy the overall portfolio, leading to less volatility and better long-term performance.

Rebalancing your portfolio depending on your investment or calendar is also crucial. You may choose to rebalance when the weight of an asset class decreases or increases by a specific percentage that you’ve determined before.  Your portfolio will tell you when to rebalance to avoid concentrating your investments.  A financial adviser will help you find ways to minimize costs as rebalancing can trigger tax consequences and transaction fees. 

Strategic Asset Allocation – Risk and Reward

Risk and reward are closely related when it comes to investing.  You need to understand that all investments have some degree of risk. If you’re looking to buy stocks, mutual funds, or bonds, it’s essential to understand that there’s a possibility of losing some or all of your money.

However, the best part is that with risk, there’s a huge potential for a greater investment return. When working with a financial goal and considering the long-term, you can make more money by investing in assets like bonds and stocks, instead of limiting your investments to less risky assets like cash equivalents.  If you’re looking for a short-term financial goal, you’re better off working with cash investments. 

The best financial advisor in Palm Beach understands your risk tolerance and is willing to work with you to help you achieve greater returns with the best strategic asset allocation advice. We understand that some are conservative investors and have a low-risk tolerance. In this case, we work with you to choose options that will preserve your original investment.  We also have a team of aggressive investors with a high-risk tolerance. Our team will seek to understand your risk tolerance before suggesting the right investment for you. 

You need an adviser who will make you money in good times yet protect your portfolio during bad times. One of the many ways they can fulfill that promise is never to let you talk them into “firing” an asset class when that would be inappropriate for achieving your long-term goals.

You don’t need a facilitator; you need an experienced adviser who sometimes tells you things you don’t want to hear. Your trust and confidence in your adviser’s honesty, skill, and uncompromising commitment to your long term goals are what will help you get to your destination safely. With Pillar Wealth Management, you can trust you and your investments will go far. 

Haitham “Hutch” E. Ashoo and Christopher G. Snyder are the principals of Pillar Financial Services, a wealth management firm in Walnut Creek. Contact them at 800.669.6780