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On a Quest for the Best UHNW Asset Allocation? It Doesn’t Exist

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The Best Portfolio Asset Allocation for Ultra-High Net Worth! Does It Exist?

See the Prediction that Came True, Confirming the Problem with Cookie Cutter Investment Plans

Are you looking for the ideal portfolio asset allocation for ultra-high net worth households?

Before you look any further, consider this: You’ll never find it because it doesn’t exist. There is no one-size-fits-all allocation, even if you narrow the field to ultra-high net worth investors.

If you go to most big banks, discount brokerage firms, or typical financial advisors and tell them you want the best asset allocation for an ultra-high net worth investor, they will most likely begin by asking about your risk tolerance.

Once you cough that up and agree to restrict yourself to one of their pre-defined risk tolerance boxes, they’ll funnel you into a pre-determined asset allocation with pre-selected investments. You’ll most likely end up with a 70/30 or 60/40 asset allocation, meaning 60-70% of your assets are in equities, and 30-40% are in bonds.

If you emphasize your high net worth or ultra-high net worth status in that meeting, and that you want something designed specifically for someone like you, their eyes will probably light up, but the process won’t change much.

This is the best that most investment firms have to offer:

Pre-selected investments and pre-determined asset allocations based on nebulous categories of risk tolerance, and some discussion about retirement goals.

Want a 100% Customized Asset Allocation that Actually Delivers the Life You Want?

Schedule a free chat with CEO and Co-Founder Hutch Ashoo

 

The Problem with Cookie Cutter Asset Allocations

We have written about this  many times because asset allocation is the single most important factor in creating an investment plan that will provide you with lifelong financial serenity.

We have also warned of the perils of the 60/40 “rule.”

But you don’t just have to take our word for it. Here’s how a real estate investment firm described it in 2019 – before the COVID crisis hit (bolds and italics ours):

“The 60/40 portfolio allocation strategy is the go-to investment strategy by financial planners and advisors. It’s simple and churns fees… and is a classic approach to allocation, but it’s also outdated and, in the face of recession, outright dangerous.

They go on to say something very similar to what we said when writing about the perils of 60/40 – that when this asset allocation became so popular, bond yields averaged 8%. That meant that when the market became volatile as it always does, bonds provided a solid buffer against temporary losses. They continue:

“But with the average bond yield at 1.6% for the last 10 years, this strategy is obsolete and if your financial advisor has you in a 60/40 allocation mix, you may be in trouble when the next recession hits.”

More accurate prophecies have rarely been uttered.

Less than a year later when the coronavirus arrived, investors across the board with 60/40 asset allocations suffered massive losses, just as predicted. If you were one of them, your angst has probably led you here to this article, looking for a better asset allocation for high net worth investors. You came to the right place.

The cookie cutter didn’t cut it.

The Search for Something Better

Surely there must be a better approach to asset allocation, something attuned to people of your financial caliber. You have so much to choose from:

Public equities, which include:

  • Individual company equities
  • Mutual funds
  • Domestic equities
  • International equities

Beyond equities, your options include:

  • Bonds
  • Commodities
  • Hedge funds
  • Private equity
  • Real estate
  • Cash

Can you generate a plan from these choices that delivers greater confidence than some outdated rule that only serves the big banks and advisors?

Yes! You can!

But the reason we say there is no ‘best’ asset allocation is because your ideal plan will not be the same as anyone else’s. Here’s how to create the confidence-building foundation of a strong asset allocation.

6 Keys to Determining Your Most Stable and High Performing Asset Allocation

1. Minimize Risk

The stock market will never stop being volatile. Even in the ten years before the coronavirus, the market gyrated so much that pundits wondered several times if the ‘bull market’ was over. But then it limped back for a little more growth.

You must reduce your exposure to market volatility, which is both unavoidable and unpredictable. It will happen. You can’t time your way around it.

2. Customize Around Your Desired Life

You have short-term goals and desires, and long-term ones. You have retirement dreams, hopes for the future, expectations for what you’ll be doing ten, twenty, and thirty years from now. And while everyone knows not every expectation will probably be met, you can still plan for them as if they will. With a plan, you at least have a chance of actually achieving all your short and long term dreams and goals.

That customized plan will not look like anyone else’s plan, because they don’t have your dreams and goals, or your financial situation.

Your ideal asset allocation will only be found when you build it around the life you want to live.

3. Do Not Accept that High Performance Requires High Risk

There is no tradeoff here. You can minimize risk without sacrificing performance – even in a recession. We have developed an approach that achieves this, and we are using it now for current clients.

You do not have to ‘settle’ for a conservative investment plan just to avoid the costs and risks of market volatility. There are other paths to financial serenity that still deliver optimized performance!

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Financial Advisor Sausalito4. Once You Have a Plan – Stick to It

A customized investment plan powered by your ideal asset allocation must continue to serve your interests and long-term goals, no matter what. You cannot abandon ship when a storm hits. You keep forging ahead, because you know the plan is built upon something more than a silly rule dreamed up by people who like round numbers.

5. When a Market Crisis Hits – Re-evaluate and Adjust

What happens when the market collapses? The coronavirus has forced everyone, yet again, to wrestle with that question. Something else will force it again down the road. If you hope to live a long and enjoyable retirement of twenty, thirty, or even forty years, you are going to encounter multiple market crises. It is virtually guaranteed.

With a customized and well-crafted asset allocation in your corner, you respond to market crises by re-evaluating your plan and making targeted adjustments.

But you do not abandon ship. You do not throw it out and start over. You do not panic. Your asset allocation must be built in anticipation of market crises. Otherwise, it’s not a very good allocation.

6. When a Personal Crisis Hits – Re-evaluate and Adjust

Some challenges that affect your finances aren’t external. Medical events, legal troubles, business failures, early death of a loved one – a lot of things we don’t plan on can upend what we were planning on.

But just like a market crisis, these don’t require us to toss out the asset allocation our investment plan was built on. It just requires an adjustment.

Here’s a summary of what we’ve said so far:

Create your customized asset allocation based on lifestyle goals and dreams, not just risk tolerance.

Build your investment plan upon it.

Stick to it.

Adjust and rebalance it regularly, and also when a crisis hits.

Don’t ever abandon it.

That’s your path to financial serenity.

There is just one question remaining:

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How Do I Create My Customized High Net Worth Asset Allocation?

You begin not with risk tolerance, but with questions. For example:

  • How much do you want to leave to your heirs?
  • What are your leisure and entertainment plans and preferences?
  • How will future tax law changes affect your plan?
  • Do you have philanthropic goals during and before retirement?
  • If you or a close family member becomes physically incapacitated, will you be more than adequately provided for?
  • Do you spend time doing what you really want to do?

Your answers to these sorts of questions will look very different than for most people.

The next step is to assess your current financial situation.

Are you still working, and if so, what are you bringing in? How much is in your investment portfolio now, and where is it invested? Do you hold company stock, and if so, what percentage of your portfolio does it comprise? Do you own physical assets such as real estate and rare or original collectibles?

When we examine your wealth and income, and when we integrate your answers to questions such as the ones listed above into the mix, we begin to get a picture of what you will be able to do with the rest of your life.

Our goal at Pillar Wealth Management is to establish your desired lifestyle outcomes as fixtures in your financial plan, built upon the foundation of the customized, optimized asset allocation.

We call this the Comfort Zone.

It is the place where you can relax, knowing that your lifestyle dreams and desires are as certain as they can be, no matter what happens in the financial world.

How do you find your Comfort Zone?

Want a 100% Customized Asset Allocation that Actually Delivers the Life You Want?

Schedule a free chat with CEO and Co-Founder Hutch Ashoo

Project Your Performance Through 1000 Stress-Test Scenarios

The goal of a customized asset allocation isn’t a number. It’s a lifestyle outcome. We therefore seek to unearth the asset allocation that will deliver all the lifestyle outcomes you desire.

Does that makes sense?

If you have $20 million, our goal isn’t to get you to $40 million just because doubling seems like a good goal. Our goal is to fully fund all the lifestyle outcomes you want for the remainder of your life. If it takes $40 million to achieve those, then $40 million will be the goal.

But your asset allocation will look very different if you’re reaching for $40 million as opposed to $25 million to fund your desired lifestyle.

What we do is, we take your portfolio, craft an asset allocation, and run it through 1000 stress tests. These can be thought of as ‘what-if’ scenarios. What if this happened in the stock market? What if that happened in the world? How would it affect my investment performance?

Using historical data going back 100 years, we have built a proprietary process for modeling how a given asset allocation holds up against 1000 such scenarios.

Assess the Outcomes

Of those 1000 scenarios, success is, once again, measured by the accomplishment of your lifestyle outcomes. If your portfolio stress test projects success in all your goals in 750 to 900 of the scenarios, you are in the Comfort Zone.

This means, you are as assured as a person can be that no matter what happens, you will be able to live the life you have hoped for.

Make Quarterly Adjustments

As mentioned earlier, things happen that are outside everyone’s control. They might be market crises like COVID-19. They might be personal crises. And, your long term goals will also just naturally change as you age. What you care about at age 45 will be different than what you care about at 65.

For this reason, we continually adjust your plan, re-run the 1000 stress tests, and rebalance your asset allocation accordingly.

We do this every quarter, crisis or not. But when a crisis hits, we can run it yet again and assure you that you remain within the Comfort Zone. If you ever do fall outside of it, all that is required is a few targeted adjustments.

As stated before, we do not abandon the plan. We adjust the plan. We massage the plan. We re-shape the plan. But the core elements and principles powering it do not change.

Your customized asset allocation can deliver the lifestyle and the financial serenity your desire. The path to finding it requires you to step outside the pre-set boxes of risk tolerance and cookie-cutter plans you’ll find almost anywhere else you go.

Want a 100% Customized Asset Allocation that Actually Delivers the Life You Want?

Schedule a free chat with CEO and Co-Founder Hutch Ashoo

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