Best Investments for High-Net-Worth Individuals (HNWIs)
Adam Fayed
Managing Director - adamfayed.com - helping expats and high-net-worth individuals
What is the best investment for high-net-worth individuals (HNWIs)?
The answer might sound simple.
Invest in yourself and your primary business if you have one.
However, whilst that might work in building the most wealth possible, most HNWIs invest to preserve wealth rather than grow it.
After all, history is laden with examples of people relying on stock options and a primary business, all for it to go up in smoke.
Covid-19 and associated lockdowns and various other events have recently closed down businesses with pedigrees that go back a century or more.
The question is,
"What are the best investments to preserve wealth for HNWIs on a risk-adjusted basis?"?
Consider your individual situation.
?Before going any further, consider your individual situation. Where do you live? What is your nationality? Are you an expat living abroad or a local? What do you want to achieve?
All of these things will impact on the answer to this question. It won’t just impact on investment choices. It will also impact questions such as structuring (trusts, life insurance, foundations, etc).
How about the stock market and diversification?
The major stock markets have always come back from falls. Even the Japanese Nikkei, which fell and didn’t recover for thirty years, has came back.
The S&P500, adjusted for dividend reinvestment, has one of the best records of always coming back and delivering excellent returns.
However, we must remember that the S&P500 can stagnate for long periods. 1965-1982 was one such period, and so was 2000-2012.
In certain situations, this can be an issue.
When HNWIs are investing and need an income from their pots, waiting 12-17 years to get returns isn't ideal.
Imagine somebody who retried in 2000 with millions from selling a business, and they invested it all in the S&P500.
They would have had to withdraw to support their lifestyle against a falling and stagnating portfolio.
It would have eventually worked out, but it would have been emotionally tough.
The question is "how can you deal with such issues?".
The main options are:
Regarding diversification, the typical advice is the 60%/40% portfolio, with 40% being in government and corporate bonds.
Whilst it might be an exaggeration to say that the 60%/40% portfolio is dead, unlike some of the media reports, there are indeed many alternatives.
This can include trend-following funds and various alternative assets.
Things to avoid.
Everybody, regardless of their wealth, has particular bias’ that can result in taking hidden risks.
Some of the main ones to avoid are:
This is thinking that past recent performances will always replicate. Look at the US stock markets recently. Many people think the S&P 500 will beat world markets forever and will average from 15% to 20%. Historically, international and US markets take turns to beat one another.
2. Familiarity bias.?
Investors often prefer investing in their home countries' stock markets, as per the graph below from Rational Reminder.
This can increase investors' risk in certain situations. For instance, expats abroad can often be served better by investing in USD-denominated portfolios, especially if they live in places with currencies fixed to the dollar.
Likewise, it is easy for investors to double their risk by investing in the same company they work for. Having stock options or only investing in your own company might feel safe, but it often results in risks, including hidden ones.
3. Being too aggressive with withdrawal rates.
Many people have heard about the 4% retirement rule. This is a good rule of thumb if you want a thirty-year retirement, but it is essential to plan for the worst.
For some HNWIs, that might involve a lower withdrawal rate or a reallocation of assets.
Conclusion
HNWIs need to focus on the individual circumstances, which will guide your choices and those of your advisor.
In general, preserving wealth requires sensible diversification rather than focusing on the highest possible return.
As the 60%/40% portfolio is coming under pressure, it is important to look for sensible ways to diversify, including having downside-protection in a portfolio.