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High Net Worth Investment Performance: How to Steer Clear of Worry

The Truth About High Net Worth Investment Performance

3 Guideposts to Steer You to a Life of Worry-Free Financial Serenity

Everyone wants to earn strong investment performance. If you earn 8% one year and then 10% the next, you’re happier the second year. Pretty simple. Where people get off track – especially high net worth investors – is when they get trapped in the belief that there are secrets to earning the very best performance that only a few guru-specialist insiders and experts have the keys to unlock.

These investors persist in searching out those rarefied savants, gifted with exceptional foresight and creativity, unparalleled understanding about markets, companies, and trends, and peerless research skills with an army of loyal workers behind them. So, someone like Gru from Despicable Me. [ideally, you would put a small headshot of him here]

But in all seriousness, people go looking for these exceptional individuals they believe can steer them to the highest possible performance, outperform the market, beat all their friends and competitors, and do it all while sipping pina coladas on the beach living a worry-free lifestyle.

The truth about investment performance is – yes, you can live a worry-free lifestyle as a high net worth or ultra-high net worth individual. But you won’t find it that way. A CNBC article made this keen observation about performance

“If the client thinks the advisor has a silver bullet for investment performance, or if an advisor says ‘we always beat the market,’ the client is set up for disappointment.”

Have you been set up for disappointment? By your current advisor? By the media? By friends, relatives or co-workers? If your expectations exceed the common reality experienced by over 90% of other investors, then yes, you have been set up for disappointment.

The truth about investment performance can be broken down into three parts that we’ll call guideposts. Performance isn’t about having one or two great years where you smoke everyone, surrounded by dud years filled with missed opportunities and hindsight-biased declarations like, “I should have seen that coming.” So let’s break down investment performance into three parts.

Guidepost #1: Stop Obsessing about Beating the Market

Outperforming the market is the wrong goal  for investors who are serious about wanting the highest possible and consistent long term growth. Again, anyone can have one great year. So what? The serious high net worth investor should be looking for strong performance year after year.

According to the SPIVA US Scorecard put out by Standard and Poor’s, 92.33% of large-cap managers, 94.81% of mid-cap managers, and 95.73% of small-cap managers failed to outperform their market benchmarks.

This wasn’t just one year. This was over a 15-year period leading up to 2017. So it included the flat growth period following the dotcom bust, the 2008 crash and subsequent recession, and the strong recovery years that followed.

That’s important, because your investments will have to plow through unpredictable, changing social and economic conditions for the rest of your life.

So what this tells us is, in a 15-year period of time that included strong growth, a major crash, and flat growth, about 94% of money managers and financial advisors failed to even match, let alone exceed, the market’s performance.

Wealth Management Fremont

What can we learn from this? A couple things:

Lesson 1: Don’t try to time the market

You can be absolutely sure that lots of advisors and managers tried to time the market during this 15-year stretch. Some pulled out when the market crashed. They then had to try to find the ideal moment to get back in. Others stayed in through the crash, panicked when it got worse, and pulled out even later.

Timing the market doesn’t work.

Another study found, over a 20-year period (see – we don’t bother quoting data from just one year, because it’s just one year, so who cares?), that equity investors trying to time the market [link to blog 17] lagged their benchmarks by 4.66%.

That’s a large gap over a 20-year period. For ultra-high net worth investors, that’s going to add up to millions of dollars. If you’re hoping to use your investment performance gains to buy a second vacation home in Napa or Incline Village in Nevada, trying to time the market isn’t going to get you there.

Lesson 2: Lean toward index investing

Through all the ups and downs over that 15-year period, for investors who stuck to the right index investing strategy (not just any indexes will do – see why index investing isn’t so simple), they would have outperformed 94% of their peers.

Think about that. You want the best, most optimized investment performance, right? And you want it every year, not just one flash in the pan. By weighting more of your investments toward the right indexes, you would have gotten higher performance than nearly everyone else!

Isn’t that what you want?

For investors who truly want the highest possible performance, a shift in your thinking is required. You must come to grips with this truth about investing:

Your goal is not to beat the market. Your goal is to beat other investors, managers, and financial advisors.

Outperform the other guys, and you will be in the top 6%. This is what the data says.

Guidepost #2: Keep Your Costs Down

Suppose, against the data and against our well-supported advice from 30 years of experience helping high net worth investors achieve the strongest performance and financial serenity, you decide to persist with an active management investment strategy.

And suppose, against the data, you do very well and find yourself in that elusive 6% that does manage to beat the market over a long stretch of time. Let’s say you beat the market by 3% over a 10 year period.

Even if all that goes your way, what will be your net returns, after taxes, and after all the other costs you’ll have to pay along the way? Think of it this way: If you earn 16% growth, but owe 50% in state and federal taxes on your gains,

then the truth about your investment performance is that you only earned 8%. Doesn’t everyone have to pay the same taxes, you might be wondering? As a matter of fact – no. They do not.

You can actually save hundreds of thousands, or millions depending on your portfolio size, on taxes over a 15-year period, if you use an optimized, strategic investment strategy. And taxes represent just one of many costs that can erode even the most boast-worthy investment performance. See 6 costs that can torpedo your investment gains. Saving on your costs of investment is part of performance.

Wealth Management Belvedere Tiburon

If one wealth manager earns you 16% growth but you lose half of that to various costs, and another wealth manager earns you 14% but you only lose 3% to costs, the second manager is earning you better performance. 11% is higher than 8%. “But, why can’t I have the first manager, and get them to lower the costs?”

The answer is, because the strategy of investment that leads to higher taxes and other costs may in fact be the only way to earn that 16% growth. They may be using a high risk investment strategy that includes frequent buying and selling activity. This approach incurs higher taxes. (Again, taxes are just one cost of investing. See this article for 5 more)

Every now and then, the high risk approach wins a round. But it also comes with higher costs. Again, as the quote at the outset put it – there is no silver bullet to investment performance.

The goal is to outperform other managers and advisors, not the market. The other goal – which is actually much more important to you – is to optimize your performance to fit your life and long term goals and plans.

Guidepost #3: Balance Performance with Risk

This may be the most critical guidepost of all. Higher risk can lead to higher performance, but it can also produce the greatest losses. Lower risk will protect you against big losses, but it also can’t achieve the highest gains.

The trick is to balance your risk with your desired performance. We call this ‘optimized performance,’ and we achieve it through ‘strategic investing.’ Pillar doesn’t believe in active management or passive management. We believe in strategic management.

Too much active management increases your risk and your costs, and makes you less secure. Plus, as you’ve seen, it usually underperforms against the market. Active management invites worry, fear, and anxiety. You can tell when an ultra-high net worth investor uses active management because, even on vacation, they’re on their phone all the time, checking their investment performance. Why?

Because they’re worried about it. We don’t believe you should have to worry about your finances. 

On the other hand, too much passive management leads to missed opportunities for growth and shaky long term security. And you can fall into high risk situations if you don’t make changes at the most strategically wise moments. Investors relying too much on passive management wake up one day and wonder, “What happened?”

In both of these cases, the solution isn’t to worry more, get more involved, and ‘stay on top of it.’ The solution is strategic management with the help of a wealth manager with decades of experience earning optimized performance for high net worth investors.

Strategic management balances performance with risk. But this will look different for each investor, because each investor has different goals and life circumstances affecting their finances.

Strategic management is driven by several key elements:

    • The financial plan comes first
    • Quarterly updates keep you balanced, properly allocated, and aware
    • Targeted ongoing adjustments as your life situation changes
    • Continuous balancing of risk vs performance
    • Consistently earn the highest possible performance without undue risk

See the 8 essential components of a high net worth financial plan

How to Earn Long Term Optimized Investment Performance

As you’ve seen, you must do three things to achieve optimized performance:

1) Emphasize index investing strategies over market-beating nonsense
2) Keep your costs low
3) Balance risk against performance

When you succeed in all three of these areas, you will experience the financial serenity that everyone wants but few know how to find. Serenity can’t be found from a couple great years of performance. Serenity is only possible if you feel secure for the foreseeable future – looking out 20, 30, even 40 years.

For a more detailed exploration into investment performance, get our eBook, Outstanding Portfolio Performance: The Shifts To Financial Security And Serenity For Successful Multi-Millionaires.

In this eBook, you’ll meet several high net worth investors, some of whom made costly mistakes, and others who benefitted from the strategic investment approach you’ve just been exposed to. You’ll also see why big banks and investment firms usually fail to provide the comprehensive, customized financial planning that high net worth and ultra-high net worth investors need. It’s a free resource, written exclusively for high net worth investors. Request your free copy here

Wealth Management Walnut Creek