Ultra High Net Worth Asset Allocation – 6 Critical Elements

Ultra high net worth asset allocation—Choosing wealth management that appreciates asset allocation’s primacy is in the very best interests of every high net worth investor. Asset allocation takes center stage in the formulation of every customized plan we produce for investors with $5 million to $500 million in assets.

STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION

7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning

The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.

Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.

The biggest Financial Planners' Mistake That Will Hurt Your Financial Security!

How To Find Your GO-TO High Net Worth Financial Planner

How Pillar's High Net Worth Financial Planning Process Is Different

Multi-Family Office For Ultra-High Net Worth Families

Founder & Managing Member Pillar Wealth Management

The insights you’ll discover from our published book will help you integrate a variety of wealth management professionals’ tools with financial planning, including investment strategy and retirement planning, guiding your future security alongside complex financial strategies so your human and financial capital will both flourish.

Clients frequently share with us how the knowledge gained from this book helped provide them with tremendous clarity, shattering industry-pitched ideologies while offering insight and direction in making important financial decisions.

A well-known study by Brinson, Beebower, and Hood found that over 90% of the variation in portfolio investment performance can be traced to asset allocation.

To be clear, as this study has often been misused on this point, 90% of the figure covers the general allocation classes of equities, bonds, and cash and only slightly changes when investment sub-classes like mid-cap, small-cap, and international are considered.

Variations from those classes accounted for less than 10% of the total, and only about 6% of variation came from security selection.

Studies of just about anything rarely conclude that 90% of a thing is caused by one variable. So when they do, everyone ought to pay attention.

In this article, you’ll see six reasons why asset allocation has such an outsize effect on your investment performance. But you’ll also learn why asset allocation alone isn’t enough.

Everyone loves online calculators, and you can find ultra high net worth asset allocation calculators, such as this one.

But those calculators do not consider the single most important question everyone must answer before finalizing their investment plan. In a bit, you’ll see what that question is and why you must answer it before determining your ideal asset allocation.

Asset Allocation Wealth Status

Pension money is usually for the long haul and can be invested a little more aggressively, unless retirement is eight years or closer.

Ultra-high net worth individuals are often business owners who enjoy investing in alternative investments. A small portion of their portfolio carefully placed in alternative investments is not unreasonable. However, alternative investments are often highly risky, non-transparent, and illiquid, so it’s wiser to avoid alternatives because the risks outweigh the advantages.

How to implement asset diversification across High Net Worth portfolios

It’s important for a UHNW portfolio to be highly diversified due to the size of each investment, which may be millions of dollars. Moreover, the investment horizon may be quite long, which further supports the need for diversification.

Diversified Assets

Engaging the services of a financial advisor is recommended for creating a diversified portfolio. A financial expert can assess the risks attached to investments in various asset classes.

Alternative Investments

Alternatives are a popular source of diversified assets, often quite lucrative, but they carry a greater risk.

Cash

It’s important to carry enough cash to withstand unforeseen expenses. Common vehicles for cash include high-interest savings accounts, CDs, and money market accounts.

Testimonial From Satisfied Clients

Average Asset Allocation for High Net Worth Investors

According to U.S. Trust 2018 Insights on Wealth & Worth, a survey of 892 high-net-worth and ultra-high-net-worth Americans with $3 million or more in investable assets, not including their primary residence, their average asset allocation was 55% stocks, 21% bonds, 15% cash, 6% alternatives, and 4% other.

Four generations of High Net Worth responders

The survey collected data on four generations: Millennials: Ages 21 – 37 (Born 1981 – 1997); Generation X: Ages 38 – 53 (Born 1965 – 1980); Baby Boomers: Ages 54 – 72 (Born 1946 – 1964); and the Silent Generation: Ages 73+ (Born before 1946).

Asset allocation for Millennials was 46% stocks, 16% bonds, 21% cash, and 13% alternatives. The distribution for Gen X was 54% stocks, 16% bonds, 16% cash, and 10% alternatives. For Boomers, the asset allocation was 56% stocks, 23% bonds, 12% cash, and 4% alternatives. The Silent Generations had 61% of their assets in stocks, 19% in bonds, 13% in cash, and 3% in alternatives.

Some key points from the survey about asset allocation

Regarding gender, men are slightly more aggressive than women in their stock allocation. Between 2017 and 2018, every age group increased their stock allocation, with the Silent Generation having the most aggressive stock allocation.

Biggest Asset Allocation Surprise

While the Silent Generation’s high asset allocation in stocks may be a surprise, it could be understood in terms of the historically high returns on stock, and the fact that older folks are more familiar with long-term investing.

Historical Portfolio Composition Returns

One traditional portfolio consists of a 40/60 split between stocks and bonds, with an average annual return of 7.8% between 1926 and 2016. A portfolio with a 50/50 split between stock and bonds yielded an average yearly return of 8.3% during the same period, while a 60/40 split showed an average 8.7% return.

You can’t count on this level of ROI every year; it’s meant for the long term, suitable for younger investors. The older, wealthier crowd may not worry because they have plenty of money to cover the coming decades.

Stay the Course and Keep on Investing

The stock market is a good investment for the long haul, so having a 50–100% allocation in stock is wise. Include bonds for steady income, some cash for liquidity, and alternatives for a higher return with more risk. And don’t monitor your stocks every day!

Invest In Real Estate Wisely

If real estate investing appeals to you (and you have to like it—properties are never maintenance-free). Real estate tends to be stable in value, keeping up with inflation, and you can expect returns of at least 10%.

The National Association of Real Estate Investment Trusts (Nareit) was formed in 1960 when Congress created REITs to give all investors access to income-producing commercial real estate. According to Nariet statistics, REITs in all 16 sectors have outperformed the S&P 500 over the long term, albeit not every year.

6 Critical Elements About Ultra High Net Worth Asset Allocation

Here are the six reasons why ultra high net worth asset allocation affects your long-term growth more than any other factor.

1. Market Volatility
2. Optimized Asset Allocation Balances Higher Growth with Smaller Losses
3. Ultra High Net Worth Asset Allocation Takes Advantage of Time
4. Asset Allocation Can Be Modified As Life Changes
5. Ultra High Net Worth Asset Allocation Can Be Preserved
6. The Shortfalls of Asset Allocation Calculators and Formulas

1. Market Volatility

Market Volatility Is Unavoidable

A study from Guggenheim Funds analyzed market behavior dating back to 1946.

It defined a ‘pullback’ as a market reduction between 5 and 10%. A ‘correction’ was defined as between 10 and 20%. Lastly, they defined a ‘bear market’ as a reduction of 20% or greater.

This chart reveals what the study observed:

What is considered a high net worth portfolio?

High net worth applies to a person or family whose assets are valued at more than $1 million. Often, such large valuations of assets can require the expertise of a firm that offers private wealth management services.

The point is simple:

The market is not predictable, and its effects may not be avoidable. Moreover, you could lose more than you should if you're working with the wrong financial advisor. 

People who believe they can avoid downturns by timing the market haven’t studied the data. Here’s a more in-depth exploration of the failures of market timing.

The most shocking revelation comes from a study revealing that investors who missed the 10 top-performing months over the 30 years from 1988 to 2017 earned less than half what they would have made had they just ridden all the ups and downs during those volatile years (which included 3 recessions and 2 market bubbles).

Other studies have narrowed it down to a handful of specific days, not months, that produced similarly staggering losses, if you missed them.

Since one can never time the markets, a healthy UHNW asset allocation is the best weapon for optimizing your performance against market volatility. If you're ready to speak with a wealth management team that has successfully navigated market cycles, contact Pillar to start the conversation. We've seen the market's ups and downs over the past thirty years and can put you on the proper path.

Market Volatility Is Unpredictable

No one can predict market performance down to specific months or days, but that’s what it would take to successfully time the market and outperform the investors just riding it out.

Market volatility happens, and you can’t avoid it unless you want to miss out on the biggest possible gains, too. In that case, you might as well just park it all in a money market or CD.

Only an optimized ultra high net worth asset allocation can protect you from the always volatile market, which fluctuates far more often than the larger economy.

Why is this true?

Because the market’s volatility causes equities to rise and fall in value. And while bonds also change in value, they don’t fluctuate nearly as much, and thus act as a stabilizer against the roller coaster stock market.

Even more stable, though with much smaller gains, is cash, which includes treasury bills, money markets, certificates of deposit, and higher-yield savings accounts. Therefore, an optimized asset allocation that includes equities, bonds, and cash protects your wealth from the volatile stock market while still earning you the highest possible gains for your risk tolerance.

2. Optimized Asset Allocation Balances Higher Growth with Smaller Losses

When the markets lose value from a pullback, a correction, or a bear market, the equities portion of your investments will likely lose value, too. But with the right mix of bonds and cash in your ultra high net worth asset allocation, you can successfully ride out the storm without your portfolio suffering the steepest losses.

Market volatility’s best friends are anxiety and worry, and you can keep those out of your life with an optimized asset allocation. An even more complete ultra high net worth asset allocation often includes real estate investments.

But the flip side is also true. While an optimized asset allocation protects you from losses, it also secures you the strong growth you need to reach your financial and lifestyle goals and attain financial serenity. Pillar Wealth Management’s customized plans achieve this serenity for our clients. See how we would devise an ultra high net worth asset allocation strategy for you. 

Cash always increases in value, albeit at low numbers that may or may not keep up with inflation.

Bonds exist in several varieties, some with more risk than others. But in general, bonds tend to increase in value most of the time. When they do lose value, the losses tend to be small.

Equities have the highest potential for extreme growth. So when your equities are doing well, you still have your cash and bonds working for you in the background.

When your equities struggle in a pullback, correction, or bear market, your cash and bonds keep your overall portfolio stable. For more ways to protect your ultra-high net worth portfolio, check out this free hardcover book, with its in-depth explanation of ultra high net worth asset allocation. And again, real estate can provide an additional measure of stability.

3. Ultra High Net Worth Asset Allocation Takes Advantage of Time

When it comes to investing, time is your single greatest resource.

Even for high net worth retirees in their 60s or early 70s, optimized ultra high net worth asset allocation protects them in these critical years when the focus shifts to making their money last throughout your life.

But for investors in their 40s and 50s, an optimized asset allocation helps ensure the long-term growth and performance they need to reach their lifestyle and financial goals, weather the short-term storms, and grow during the boom years. Over 10, 20, and 30-year periods, the gains are much greater than the losses, given that asset allocation is prioritized.

4. Asset Allocation Can Be Adjusted as Life Changes

When it comes to investing, time is your single greatest resource.

Even for high net worth retirees in their 60s or early 70s, optimized ultra high net worth asset allocation protects them in these critical years when the focus shifts to making their money last throughout your life.

But for investors in their 40s and 50s, an optimized asset allocation helps ensure the long-term growth and performance they need to reach their lifestyle and financial goals, weather the short-term storms, and grow during the boom years. Over 10, 20, and 30-year periods, the gains are much greater than the losses, given that asset allocation is prioritized.

5. Ultra High Net Worth Asset Allocation Can Be Preserved

Once you’ve settled on your optimized allocation for this stage of life, you can easily preserve it through rebalancing. Rebalancing paired with ultra high net worth asset allocation are the keys to maintaining the long-term security of your portfolio.

The bottom line is this:

Asset allocation for ultra high net worth is not something you can set and forget. It must be changed based on life circumstances and, more realistically, maintained by frequent rebalancing (we do it four times a year for our high net worth clients).

Either you will do it yourself or have someone else do it for you. Somebody has to keep your ultra high net worth asset allocation optimized and on track.

It’s like an airplane flying from San Francisco to Tokyo. In general, this is easy. Fly west. But the farther west you go, the more adjustments and fine-tuning the pilot must make in order to stay on track and actually land on the correct runway.

Avoid making the right adjustments, and you’ll end up in Seoul or Beijing. Or the ocean when you run out of fuel, the equivalent of running out of money before you die.

Maintaining your optimized ultra high net worth asset allocation doesn’t require large scale changes, unless you experience major financial events, such as unexpected medical expenses for you or your relatives.

Barring those types of events, your ultra high net worth asset allocation requires periodic and ongoing adjustments, just like the pilot consistently performs while the passengers sleep, oblivious to the pilot's flight expertise and experience.

This is why we call it wealth management, as opposed to wealth creation. You don’t just do it once. It’s not ‘set it and forget it.’

Again, you can either do this yourself or pay someone else (the pilot who knows how to fly a plane) to do it. But someone has to do it.

If you want to see what a high net worth portfolio plan and your ideal customized ultra high net worth asset allocation look like, schedule a Wealth Management Analysis meeting with one of our two high net worth wealth managers.

6. The Shortfalls of Asset Allocation Calculators and Formulas

Online calculators like the one mentioned at the start of this article try to apply standardized formulas to individual lives based on pre-defined “risk tolerances.” They are inherently non-customized.

Some state that a passive ultra high net worth allocation should be used by a moderate, and an aggressive one should be used by a conservative.

The problem with this approach is it starts at the wrong place.

The first step to developing an investment plan is not to determine your risk tolerance.

On the contrary, your risk tolerance – and your resulting personalized and non-formulaic ultra high net worth asset allocation – depend entirely on your unique life situation, long-term lifestyle and financial goals, and current financial status.

As a high net worth or ultra-high net worth investor, your situation is unlike that of the vast majority of people, including most of the ones using those formulas and calculators. You do NOT fit into those boxes.

• How much do you want to leave to your heirs?
• How will future tax law changes affect your plan?
• How much life insurance, if any, do you need or want?
• Do you have philanthropic goals to achieve during and before retirement?
• What are your recreational and entertainment plans and preferences?
• Will you be sufficiently cared for if you become physically unable to function?
• Do you devote time to activities that you truly enjoy?

Average investors don’t have to think about these questions in the same way as you, if at all.

You have choices. You have options.

And the choices and options you select – those determine your risk tolerance and the appropriate ultra high net worth asset allocation for you as an individual.

Everything you’ve read here about ultra high net worth asset allocation is accurate. It is the most fundamental component of an optimized financial plan.

David Swenson, who took the Yale endowment portfolio from $1 billion to $23 billion through recessions and wars, says that asset allocation is the most important investment decision of your lifetime. This is the consensus among almost all financial professionals, as this article makes clear.

The question is, which ultra high net worth asset allocation is right for you? To find out, schedule a free Wealth Management Analysis meeting. You have nothing to lose by starting a no-strings-attached conversation with our experienced team.

High Net Worth Individual Asset Allocation

Online calculators like the one mentioned at the start of this article try to apply standardized formulas to individual lives based on pre-defined “risk tolerances.” They are inherently non-customized.

Some state that a passive ultra high net worth allocation should be used by a moderate, and an aggressive one should be used by a conservative.

The problem with this approach is it starts at the wrong place.

The first step to developing an investment plan is not to determine your risk tolerance.

On the contrary, your risk tolerance – and your resulting personalized and non-formulaic ultra high net worth asset allocation – depend entirely on your unique life situation, long-term lifestyle and financial goals, and current financial status.

As a high net worth or ultra-high net worth investor, your situation is unlike that of the vast majority of people, including most of the ones using those formulas and calculators. You do NOT fit into those boxes.

• How much do you want to leave to your heirs?
• How will future tax law changes affect your plan?
• How much life insurance, if any, do you need or want?
• Do you have philanthropic goals to achieve during and before retirement?
• What are your recreational and entertainment plans and preferences?
• Will you be sufficiently cared for if you become physically unable to function?
• Do you devote time to activities that you truly enjoy?

Average investors don’t have to think about these questions in the same way as you, if at all.

You have choices. You have options.

And the choices and options you select – those determine your risk tolerance and the appropriate ultra high net worth asset allocation for you as an individual.

Everything you’ve read here about ultra high net worth asset allocation is accurate. It is the most fundamental component of an optimized financial plan.

David Swenson, who took the Yale endowment portfolio from $1 billion to $23 billion through recessions and wars, says that asset allocation is the most important investment decision of your lifetime. This is the consensus among almost all financial professionals, as this article makes clear.

The question is, which ultra high net worth asset allocation is right for you? To find out, schedule a free Wealth Management Analysis meeting. You have nothing to lose by starting a no-strings-attached conversation with our experienced team.

Surprising but True

By age, the older the investor, the more aggressive they will be in their investing posture. It may be that they have more experience and understanding in the markets, so they can take more risks—and earn more.

Moreover, with increasing wealth, older individuals are more likely to appreciate having the freedom to spend more, not being as concerned with making their wealth last for as many decades.

Historical Returns

Historically, an allocation of 60% bonds and 40% stocks has yielded a return of 7.8% as a yearly average; a 50/50 split has had a return of 8.3%, and a 40/60 split, 8.7%. So, in the past, investing in more stock has been effective, but this may not be true under current market conditions.

Keep On Investing

Some financial advisors, including those managing family offices, will recommend staying in the stock market for about 50% of investable assets, while also recommending alternative investments such as real estate, which can provide a more reliable return. Family offices often diversify into real estate investment trusts among other options. Don't put all your eggs in one basket!

Frequently Asked Questions

What do ultra-high-net-worth individuals invest in?

Real estate has been an investment that only very rich people may traditionally take pleasure in, along with their yachts and airplanes. Their investments run from stocks and foreign markets to small businesses and private equity.

What is considered a high net worth portfolio?

The portfolio above a worth of $1 million is termed to be a high net worth portfolio. The assets of this amount can include liquid assets that are kept in a bank or money market funds or can be invested directly into stocks and bonds.

Where do high net worth individuals put their money?

A high net worth individual usually invests their money in homes or other properties, treasury bills, stocks, and even in retirement accounts; they may also invest in gold or art.

Is a net worth of 15 million considered rich?

A person who is rich in the US and in the top 1% has a net worth of $15 million. In other words, to be rich is not a function of your annual income but a collection of assets.

How do the ultra wealthy allocate their funds?

The most affluent diversify investments between stocks, mutual funds, pension plans, exchange-traded funds (ETFs), real estate, and investments in other vehicles such as rare high-value artworks and other valuable collectibles.

What assets are considered high net worth?

The combination of real estate and other investments has a high net worth if it is worth at least $1 million.

What assets do the wealthy own?

In their retirement, the stock market, and the purchase of real estate. They like to buy luxury items that make their lifestyle look complete, and others even invest in antiques and fine art.

What percentage of net worth should be home equity?

Your investment in real estate, including your home, could be around 20% of your net worth, but it can also be on the higher side, not exceeding more than 40%, leaving enough scope for making other investments.

What percentage of net worth should be invested?

A simple rule of the thumb will be for 10-20% of after-tax incomes to be invested in stocks, bonds, and real estate with about 20% in each and the rest in alternatives.

What assets should I include in my net worth?

Examples would be a home or any other real estate you may own, investments, a car, personal property, cash, CDs, and bank accounts.

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