Having a robust investment strategy is what makes high net worth individuals highly successful. A well-thought-out and implemented investment plan is the critical link between developing and accomplishing tangible life-cycle goals. With the world of investing getting increasingly complex, however, making the right decisions is never easy. If you’re only getting started with more than $10 million in liquid assets, go through our guide titled 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning. When you’re ready to invest but aren’t sure where to begin, reach out to Pillar Wealth Management, a wealth management firm that specializes in serving investors with $5 million to $500 million in liquid assets.
Table of Contents
In this guide, we’ll walk you through some of the most effective investment strategies for high net worth individuals, as well as the top mistakes they should avoid while investing.
Top Investment Strategies for High Net Worth Individuals
Define Your Investment Objective
Before anything else, determine whether you’re after aggressive long-term compounding or looking to preserve capital. Perhaps what you’re trying to generate from your capital is consistent income to support your lifestyle. In any case, it’s important to define your investment objective before developing an asset allocation strategy. Once you have a purpose in mind, you can choose from a variety of options that can be tailored to fit your objectives. There are strategies that meet both aggressive and conservative investment objectives. To learn more, schedule a video consultation with our wealth managers at your convenience.
When defining your investment objective, however, be sure to take into account your investment horizon. If you’re a younger investor with a longer horizon to work with, you should be able to achieve an aggressive compounding objective with a rigorous but low-volatility strategy. But if you’re older and are interested in generating a stable cash flow from your portfolio, it might be more rational to a choose conservative strategy.
Liquidity is the key factor in determining your investment horizon. Think about how quickly you need access to your money. If you require speedy access to your invested funds, for instance, illiquid assets like real estate would not be ideal. Potential returns are certainly an enticing factor when building your portfolio, but it’s just as important to account for other factors such as liquidity and volatility before making investment decisions. If you own more than $25 million in liquid assets, be sure to check out our hardcover book titled The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies For Families Worth $25 Million To $500 Million.
Acquire and Hold on to Growth Stocks
One of the best high net worth investing strategies is to buy and hold on to growth stocks. These are business stocks that have not only displayed above-average returns but also demonstrate further potential to grow dynamically. However, making research-backed picks for your portfolio demands a lot of work and a careful analysis of the company and industry, making this space a little tricky. To understand your options, acquire our free book titled 5 Critical Shifts For Maximizing Portfolio Growth Strategies – For Families Worth $5 Million To $500 Million.
Once you’ve acquired such stocks, all you need to do is hold on to them for the long term. While this strategy is more suited to equities as an asset class, it can be applied to any investment. In the long run, the market tends to go upward. Compare the state of Wall Street from its beginning in 1792 with where it’s now. The prices of commodities and goods such as oil, gold, and even real estate all have a steep upward curve. In terms of wealth appreciation, a long-time horizon is a tremendous strategy for high net worth clients. To understand how to acquire growth stocks, schedule a video meeting with our wealth managers.
Look for Tax-Free Investments
High net worth investors typically fall into high tax brackets, which is why their investment strategies should be focused on minimizing tax exposure. Most traditional tax-reducing strategies like IRA contributions don’t prove as effective for high net worth investors as for ordinary individuals. For example, regardless of your income, IRA contributions are limited to $5,500 to $46,500 per year if you’re aged 50 or more.
For high net worth investors, tax-free municipals are an effective investment type. Suppose you need to choose between a tax-free municipal bond paying 3% interest and a taxable bond paying 5%. In case you’re in the top tax bracket, the tax-free municipal bond should be a better choice. This is because with a taxable bond, your federal income tax payments and net investment income tax can reduce your yield to lower than 3%.
Keep Your Portfolio Diversified
Diversification is the most common investment strategy, especially for high net worth investors. But there’s more to understand here. Even if you invest in multiple asset classes, it matters that you diversify within an asset class. Even if you invest in alternatives, try your best to diversify within the asset class. As you build your portfolio, be sure to assess its performance from time to time. Our Performance guide can help you improve your portfolio performance.
Target Assets with a Low Correlation to Public Markets
General guidance on diversification recommends allocating money to multiple asset classes in public markets such as bonds, large-cap equities, international equities, and REITs. However, this strategy is flawed because it would be strongly correlated to any correction in the public markets.
You may choose to invest in REITs, regarded as “alternative” assets, but their high correlation with other public market indices differentiates them from private equity real estate.
Thus, it’s best to enhance the diversification of your portfolio even further by investing in private real estate that has a low market correlation. Even when the public markets are in a downturn, the potential to generate positive returns will persist.
Try to Target Low Volatility, Consistent Returns with Long-Term Compounding
To build a strong asset portfolio, consider targeting assets that have historically demonstrated consistent returns and low volatility. Again, these attributes are commonly found in assets like private real estate.
Consider Hedge Fund Investing
Among the most effective high net worth investing strategies is to invest in hedge funds. While hedge funds come with a broad range of investment tactics, they carry unique risks, have higher management fees, and are often limited to accredited investors. Nevertheless, as a high net worth individual, you should not have a problem obtaining the status of an accredited investor.
Top investment firms like Pillar Wealth Management will keep you informed of the risks associated with hedge fund investing. For instance, they’ll tell you that you won’t get much information about the contents of the hedge fund. But this very fact gives you and your wealth manager an edge in the market, making it a benefit for you.
Besides, in an attempt to boost your returns, you may use leverage, which can be borrowed money. As long as you don’t need to draw capital in the short term and possess substantial assets, this strategy can work for you. Otherwise, it will do more harm than good.
Top Mistakes High Net Worth Individuals Must Avoid
Here are some of the mistakes you should avoid as a high net worth individual:
Going with the Crowd
One of the biggest mistakes you can make is to follow what others, such as ultra-high net worth individuals, are doing. While it’s helpful to seek inspiration from the richest, you must always base your decisions on your individual circumstances.
Even if someone has exactly the same net worth as you, their situation will be different from yours. Such factors as your goals, tolerance level, and fund requirements will all vary from those of another high net worth investor. Therefore, it’s okay to research and analyze the decision made by other high-profile investors but not a good idea to copy what they’re doing. For valuable decision-making advice, schedule a video meeting with our wealth managers today!
Not Taking Market Volatility into Account
It’s true that financial markets can be resilient, but this doesn’t mean that they’ll always act rationally. Failing to account for the highly volatile nature of the markets can lead you into financial doom, which can spell disaster for you. Always anticipate market volatility and its ability to cause unavoidable losses.
Concentrating Your Wealth in Only One Asset
This is the biggest blunder an individual can make when building their investment portfolio. Suppose you generated impressive returns from one investment instrument during a time period. Following this, you decide to invest all your savings and funds in it. In the worst-case scenario, all your savings can be wiped out with this strategy. As a high net worth individual, you may also be tempted to invest only in bonds and stocks. With the possibility of a market swing in the other direction, this concentration is similar to suicide. Hence, always try to stick to the asset allocation principle of diversification.
Investing in the US Market Only
When it comes to making investments, the American and European markets are highly preferred. As developed economies, they feature advanced tech-based systems and practices. As a high net worth investor, you may choose to invest in these markets only. This isn’t advisable because you’ll lose out on a lot of opportunities by not considering emerging markets. Singaporean, Indonesian, and Indian markets, for instance, have demonstrated unprecedented growth and tremendous resilience in the past few years. You may not know it, but even ultra-high net worth individuals are now turning to these markets.
An experienced wealth manager or financial advisor can help you find the right foreign markets to invest in. Since you may not possess sufficient knowledge about foreign markets, it’s best to rely on expert advice.
Doing Everything by Yourself
As a high net worth individual, you must be smart, accomplished, and probably possess the intelligence required to invest money and build wealth. But problems result when you begin to think that no one can do the job better than you. Remember, the more money you have, the higher will be the risk. Many high net worth individuals are glad that they hired a seasoned professional to boost their wealth.
With extensive experience serving high net worth individuals, expert wealth managers understand the ins and outs of the financial market and are more informed about changing market dynamics. To find a financial advisor, take a look at our Ultimate Guide to Choosing the Best Financial Advisor for Families Worth $5 Million to $500 Million.
If you’re a high net worth individual looking to build a profitable portfolio, follow the investing strategies and avoid the mistakes mentioned above. As you move forward, however, you’ll realize that nothing beats the value of professional advice. A team of wealth management professionals can offer valuable insight and advice on building a profitable portfolio that meets your investment objectives and works best with your tax situation. Hire Pillar Wealth Management, which serves investors with $5 million to $500 million in liquid assets. To obtain an idea of our wealth management services, schedule a video meeting with our wealth managers today!
- Pillar Wealth Management Estate Planning – At some point, you begin to wonder, “When should you begin estate planning?” “Do I need an attorney for estate planning?”…
- High Net Worth Tax Planning Strategies to Use – It’s a well-established fact that high net worth individuals pay the most taxes. But since you pay the most, you can save the most through…
- PillarWM Financial Advisor — Tax Strategies For High Net Worth – If you’re a high net worth individual with a high income, you are subject to high taxes. Your tax rate can be as high as 50% of your income…
- Hire a Financial Advisor, Los Angeles – At Pillar Wealth Management, our advisors are equipped with the knowledge and experience needed to navigate investment challenges and future plans…
- Ultra-High Net Worth Estate Planning Components – Ultra-high net worth individuals spend ample time managing their assets to ensure they’re adequately distributed or allocated to the right places.