Ultra High Net Worth Asset Allocation – 6 Critical Elements (2024)

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

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

To be clear, as this study has often been misused on this point, that 90% figure covers the general allocation classes of equities, bonds, and cash, and does not change much 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’re going to see six reasons why asset allocation causes such an outsize effect on yourinvestment performance. But, you’re also going to learn why asset allocation alone isn’t enough.

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

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

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

6 Critical Elements About Ultra High Net Worth Asset Allocation

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 Adjusted 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.

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

This chart reveals what the study observed:

As you might have guessed, the averages don’t tell the whole story. Some years, you don’t have any market downturns at all. Others, you might see several of these all during the same year.

What is considered a high net worth portfolio?

High net worth individuals and families are those with assets valued at $1 million or more. With an asset portfolio of that size, they may require the services of a wealth management firm.

The point is simple:

The market is volatile, and you can’t avoid the effects of that volatility. But you can lose a whole lot more than you should if you work with thewrong financial advisor.

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

The most shocking revelation in that exploration comes from a study finding that investors who missed just the 10 top performingmonthsover the 30-year period from 1988 to 2017 would have earnedless than halfwhat they would have made had they just ridden all the ups and downs during those volatile years (which included 3 recessions, 2 market bubbles).

Other studies have even narrowed it down to a handful of specificdays, not months, that produce similarly staggering losses if you missed them.

Since you can’t time the market, a healthy ultra high net worth asset allocation is your best weapon foroptimizing your performanceagainst market volatility. If you’re looking for awealth managementteam that knows how to ride out market cycles,reach out to Pillar to start the conversation. We’ve seen the ups and downs of the market over the past thirty years and can guide you in the right direction.

• Market Volatility Is Unpredictable

No one can predict market performance down to specific months or days, and 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 anoptimizedultra 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, anoptimizedasset allocation that includes equities, bonds, and cashprotects your wealthfrom 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 market and many equities 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 steeper 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 also 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 toprotect 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 you in these critical years when your focus shifts to making your money last throughout your life.

But for investors in their 40s and 50s, an optimized asset allocation helps ensure thelong term growth and performanceyou need to reach all your lifestyle and financial goals. You’ll weather the short-term storms, and grow during the boom years. Over 10, 20, and 30-year periods, you’ll gain much more than you’ll lose when you prioritize your asset allocation.

4. Asset Allocation Can Be Adjusted as Life Changes

As a high net worth investor in your 40s, you will likely have a different ultra high net worth asset allocation from the one you will have in your 60s. However, especially for high net worth families, this commonly espoused tenet isn’t quite as simple as the asset allocation calculators we mentioned earlier want you to believe.

We’ll get to why in a bit.

One of the great benefits of using an investment strategy based on ultra high net worth asset allocation as opposed to diversification or some other strategy is that you can easily adjust it. You might be in 60% equities, 30% bonds, and 10% cash at one time in your life.

As your life situation adjusts, your financial advisor may recommend shifting these percentages around a bit. As you age, this will happen continually. If your financial advisor doesn’t suggest adjustments as you age, you may want to consider a change. Remember, part of choosing a good financial advisor is finding somebody who adapts to your life changes and will modify you ultra high net worth asset allocation accordingly.

But diversification doesn’t protect you, because diversification can mean so many things. If you’re invested in 100 different equities, you are diversified. But if all those equities fall into just one or two market sectors, your portfolio remains at high risk. And if you have nothing in bonds or cash but are invested in 1000 equities, when the market tumbles, you won’t escape the damage.

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:

Your ultra high net worth asset allocation is not something you can just set and forget. Itmustchange in accordance with your life situation, and must be preserved by regular rebalancing (we do this four times per year for our high net worth clients).

Either you need to do it, or you need someone else to do it for you. Either way, someone needs 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 your life experiences major financial events, such asunexpected medical eventsfor 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 his or her flight expertise and experience.

This is why we call it wealthmanagement, 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. Butsomeonehas to do it.

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

6. The Shortfalls of Asset Allocation Calculators and Formulas

Online calculators like the one given 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.

A “moderate” investor should use this ultra high net worth asset allocation, an “aggressive” investor should use that one, and the “conservative” investor should use this one, they say.

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 resultingpersonalized 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 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 during and before retirement?
• What are your leisure and entertainment plans and preferences?
• If you become physically incapacitated, will you be more than adequately provided for?
• Do you spend time doing what you really want to do?

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 –thosedetermine 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 to 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

The old 60/40 rule for asset allocation is outdated and inappropriate for recessionary times, as we’ve seen this century. Nowadays, bond yields are low and stocks are volatile and not as profitable. As a result, more high-net-worth (HNW) investors are moving away from equities and toward alternative investments.

Many HNW individuals are heavily invested in their own businesses. As an investment alternative, commercial real estate is showing good returns compared to the stock market.

Equities continue to make up a large portion of a HNW portfolio, at around 50%. Next, around 20% of their portfolios consists of fixed-income investments such as bonds and pension funds. About 25% of their wealth will be invested in alternative investments, which include private equity, hedge funds, commodities, and real estate. An additional 2% will be invested in cash and cash equivalents. Finally, a HNW portfolio can include luxury goods, antique cars, or rare art.

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 advisors will recommend staying in the stock market for about 50% of the investable assets, while also recommending alternative investments such as real estate, which can provide a more reliable return. Consider investing in real estate investment trusts. In any case, don’t put all your eggs in one basket!

Further, beyond sticking to a budget, it’s important to manage the fees you pay when making investment decisions. Consult with your advisor to see where you can save on fees (and taxes). Stay financially disciplined and debt-free.

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