How the smartest folks invest

(Note - This is an important topic and doing justice to it in one brief article is not easy. Please feel free to reach out to us by registering here for a detailed session.)

While pandemic has created unprecedented tragedy, it has also created urgency for many of us to put our financial affairs in place.

While healthcare workers are fighting on the frontline, those of us who are fit and healthy, the responsibility is to keep the economic engine humming at a fast pace to create jobs, opportunities, and abundance in order to invest more in healthcare, education, and defense.

Over the last 18 years, I had the privilege and opportunity to play and experiment across multiple markets and asset classes worldwide and learn amazing insights.

Thankfully that also helped in achieving financial freedom and learn from the great masters of the game.

Many times I wonder why the so-called experts and gurus do not explain these matters of great importance, in a way that everyone can understand and benefit from.

Anyway, everyone has their reasons and ways of doing things.

For example, recently came across this report where one of the largest and most reputed investment banks published a detailed analysis of how the richest in the world (family offices/HNIs usually) allocate their capital across different asset classes to maximize the returns and minimize the risk.

While the idea here is not to compare the professional class with the rich class (not to compare apples and oranges), can we not learn from those who have mastered the game of money management while hiring the best of the best professionals to do this?

Here is a snapshot of a typical asset allocation of these richest families. The data is from the year 2020 and hence fairly recent (after the 2020 market crash due to pandemic), gathered with a survey of more than 120 family offices around the world with assets of more than a billion dollars with each family.

A. 59% of total capital is typically invested in traditional asset classes as follows.

1. 29% in equity (23% in developed markets while 6% in developing markets)
2. 17% in fixed income (11 % in developed markets and 6% in developing markets)
3. 13% cash for tactical short term opportunities

B. 35% of total capital is invested in alternative asset classes as follows.

1. 16% in private equity
2. 14% real estate
3. 5% in hedge funds

C. 6% of capital in other assets like gold, art, etc

While the numbers don't always tell the entire story, important to note here is - optimal diversification (globally), strategic as well as tactical asset allocation, preference for high growth asset classes while reducing the downside risk.

And you will see a similar pattern in other portfolios like Radical Asset Allocation (page 8) suggested by Byron Wien of The Blackstone Stone Group or All-weather portfolio suggested by Ray Dalio of the Bridgewater associates.

These huge groups manage close to a trillion-dollar USD in assets which is almost 1/3rd of India's Gross Domestic Product (GDP).

The bottom line is - it is not only about choosing the rights assets but also about having the right asset allocation tailored to individual specific needs.

I was talking to a very smart family office representative the other day and he mentioned something very interesting.

He said - "My family is so overinvested in real estate, now all I have to do is invest in other asset classes."

And he is doing well investing in equity (quality PMSes), quality startups, and AIFs. I have personally learned a lot from him and I am sure that the feeling is mutual.

In the same context, another great mentor, advisor friend Mani (One of the best intellectual property experts in India), who always tells me - "You need not be a bull or a bear (in the market), but you definitely do not want to be a bakra (sacrificial lamb)".

Well, not many of us know where the markets are headed tomorrow, the day after or next year, including Oracle of Omaha Warren Buffet, but what we do know is that if you invest in the right assets and keep your strategic asset allocation right, linked to your own risk tolerance, you will do well.

Pandemic hopefully will get controlled in due course of time. Meanwhile, we can utilize these indoor times to ensure financial safety, security, and freedom for us and our loved ones.

A gift - We are going to conduct an online session sharing many nuances of the above-mentioned concepts (different asset classes, risks and rewards, portfolio construction, and several actionable insights).

If you would like to join us on Saturday 1st May, 7 PM IST, please do Register Here.

About the author: Mahesh Dumbre enjoys working with entrepreneurs, investors, executives, and learners around the world, helping them achieve true growth potential. 

He is an ex-Tata Group executive who enjoyed building businesses globally (over 17 years in 8 countries across 11 industries, 80+ million USD value addition) as well as teaching and writing. He can be reached at [email protected].