Broker Check

Do Wealthy Individuals Invest Differently Than Everyone Else?

July 11, 2019
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What’s going on? How are wealthy individuals managing their portfolios differently than the average investor? Whether you are an average investor looking to get a leg-up, or a high net worth (HNW) individual curious as to how other HNW investors operate, we have the answers. 

While we cannot guarantee that any given tactics, tools, or vehicles we mention in the following article will provide an advantage to your current strategy, the knowledge alone is truly priceless and may provide valuable insight. Enjoy!

An Industry Perspective

Typically, a high net worth individual is someone with over $1 million in assets. More specifically, investable assets. Property, such as a home, would not add to the total. At Castle Financial, we classify HNW individuals as anyone with over $250,000 in investable assets (for questions, please reach out to us via our website www.castlefinancial.com). 

Although some firms acknowledge taking a different approach for large accounts, many utilize similar asset allocation strategies as they would with small accounts, granted, on a much larger scale. Opportunities such as the following list may only be accessible to accounts who meet the high minimums required to invest: 

  • Venture capital
  • Private equity
  • Infrastructure
  • Hedge funds
  • Agriculture
  • Real estate

The above opportunities, however, are not enabled simply by having enough capital. Different advisors and firms have different connections and partners who are able to tap into a multitude of investment avenues. As with any investment, the ROI will depend largely on the market conditions. 

To be clear, while investments such as infrastructure and real estate exist, many firms prefer to utilize the same investment strategy that has proved effective for the smaller accounts they manage. In some cases, however, the larger investments presented on our above list can present more lucrative returns than investment products which are easily accessible. 

Diversification 

If an individual meets the minimum amount required to tap into a non-conventional investment option, does that necessarily mean they should? Even on the highest levels of investing, diversification still plays an important role in protecting assets. 

For example, if a HNW individual is able to invest in a real estate option that will consume 85% of their investable assets, would they move forward with the deal? What if the real estate investment was not fruitful? Many advisors will not recommend their clients to enter into such an investment until they are able to enter into multiple investments of the same caliber. The risk may otherwise be too great. 

According to IPI, typical asset allocation for the “super-rich” is as follows:

  • Hedge Fund (18%)
  • US Equity (18%)
  • Global Equity (14%)
  • Taxable Bond (10%)
  • Private Equity (10%)
  • Muni Bond (7%)
  • Cash (7%)
  • Real Estate (6%)
  • Commodities (5%)
  • Venture Capital (2%)
  • Direct Investment (2%)
  • Other (1%)

As we mentioned above, diversification applies to all levels of investing. The risk associated with putting “all of your eggs into one basket” is great, especially on a high level. 

Real Estate Investments

Oftentimes, an association is made between real estate and HNW individuals. As demonstrated by the asset allocation list above, real estate accounts for 6% of typical assets. Real estate, however, is unique to the list - as the tangible nature of property contains a value that is typically absent from the remainder of the list. 

Additionally, property is not swayed as easily by the inconsistencies of the stock market. In essence, real estate is believed to be a more stable and sensible investment with slightly less risk - which is why scaling property investments up to a high level is an attractive option to large account holders. 

Risk Tolerance

Just as an advisor will take age, current assets, and financial goals into account when determining how much risk to take, the same applies to high net worth investors. Non-conventional options can have greater levels of risk - accompanied with a corresponding high ROI potential. For many HNW investors, preserving their current level of wealth is more important than growing. 

When an individual is still working and accumulating capital, they are generally more willing to take risks. By the same token, when a business has been sold (or when retirement age is reached) less risk is accepted. 

Closing Thoughts

While there are different opportunities available to large investment accounts, the general thought process behind investing is similar. In closing, no matter where you are with your current financial position, we hope you gained valuable insight from our article! 

Here at Castle Financial, we understand that you ultimately decide what makes you happy. Whether spending money now gives you the most enjoyment, or taking console in the safety net of zeroes in your bank account, only you can decide what brings you happiness.

If you are a high net worth individual with a $250,000 or more investment account and need help with financial planning and investment management, Castle Financial is here for you with a complimentary consultation. We have assisted hundreds of clients like you in establishing financial freedom and saving for the long-run. Check us out on our website to get in touch – www.castlefinancial.com