With greater wealth comes greater responsibility and opportunity for high net worth individuals to grow and preserve their assets. These investors often have access to more sophisticated investments and services compared to ordinary retail investors. Here we explore some of the common investing strategies and approaches suitable for high net worth investors with over $5 million in investable assets.
Asset allocation strategies for high net worth
A proper strategic asset allocation is key for high net worth investors to balance risk versus return over a long investment horizon. This involves allocating capital across various asset classes such as stocks, bonds, real estate, private equity, hedge funds, commodities, and cash. The specific percentage allocated to each depends on the investor’s risk tolerance, time horizon, liquidity needs as well as macroeconomic outlook. High net worth investors should overweight alternative investments including private equity, venture capital, and hedge funds to improve diversification and risk-adjusted returns. However, a disciplined rebalancing strategy is needed to maintain target allocations over market cycles.
Use of leverage and derivatives by high net worth investors
Given their ability to take on more risk, high net worth investors can utilize leverage and derivatives to enhance portfolio returns. Margin loans against a diversified securities portfolio can provide leverage at relatively low cost. Options strategies allow generating income through covered calls or protective puts. Futures contracts can be used to gain exposure or hedge existing positions in commodities, currencies, interest rates and stock indices. While powerful tools, leverage and derivatives require a clear understanding of the risks involved.
Tax optimization strategies
Wealthy investors have more flexibility for tax planning to minimize taxes on investment income and capital gains. Strategies include tax-loss harvesting, donating appreciated securities to charity, using separate accounts to customize tax treatment, investing in municipal bonds, and keeping investments with large unrealized gains in tax-deferred accounts. Proper estate planning through trusts and gifting can also help reduce estate taxes when transferring wealth to the next generation.
Use of professional investment managers
Given the complexities of managing substantial wealth, most high net worth investors work with professional advisors like multi-family offices, private banks and independent money managers. These specialists help with consolidated reporting, asset allocation, manager selection, tax optimization, estate planning and risk management. While costs are higher than self-directed investing, the expertise and access to institutional-quality investments can justify the fees for wealthier individuals.
In summary, high net worth investors have access to more sophisticated strategies like alternative investments, leverage, derivatives, and tax optimization to maximize risk-adjusted returns. Working with experienced professional advisors allows tapping into specialized expertise and opportunities not available to ordinary investors. However, performance ultimately depends on maintaining a disciplined long-term approach to pursue financial goals.