Ultra High Net Worth Asset Allocation

Ultra-high net worth individuals (UHNWIs) manage the challenges and opportunities of complex asset allocation issues as they navigate the landscape of wealth management. Having significant resources to manage, they require complex ways of diversifying their fortunes while protecting them and seeking growth and stability.

Ultra-high net worth asset allocation includes a delicate balance between the various classes of assets that include equities, fixed income, real estate, and alternatives. By allocating their assets strategically, UHNWIs can get the best returns while still managing risks so that their wealth keeps growing from one generation to another.

The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.

Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.

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Asset Allocation by Wealth Status

Asset AllocationUltra High Net WorthPensionHigh Net Worth
Fixed Income15%28%33%
International Equities9%26%15%
Domestic Equities20%20%28%

Table of Contents

Diversification Tactics in the UHNW Asset Manager’s Decision-Making

Tactics for Diversification in Ultra-High Net-Worth Asset Manager's Decision-Making Process.

Varied Asset Classes

Due to the scale of their investments, achieving portfolio diversification presents a more significant challenge for UHNW investors. Allocating even a minor percentage of their portfolio can equate to investing millions of dollars, which might lead to concentration risk depending on the investment choice. Engaging a financial advisor can facilitate diversification across asset classes and specific investments, mitigating these risks.

Non-Traditional Investments

Thus, ultra-high net worth investor preferences revolve around alternative investments—under an umbrella category where everything, from real estate, commodities, artworks, vintage automobiles, and even cryptocurrencies can be included. These assets usually require holding for the long term and, hence, often turn out to be illiquid with high transaction costs as a feature. Their nature and the fact that such types of assets are not traded very often can bring difficulty in estimating the present value attributed to such assets.

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Liquidity Reserves

Accordingly, to ensure funds that are required in the near term are protected from market fluctuations, exposure to volatile conditions needs to be controlled markedly. As shown in the table below, UHNW investors tend to have a much more significant reserve in their investment portfolio than other investors, not just in percentages but in absolute dollar terms.

For instance, a person holding a portfolio of $30 million and allocating to cash at 10% will have $3 million as liquid assets compared to a high net-worth individual with a $1 million portfolio, which is $20,000 for a 2% allocation. Financial advisors work by directing such investors on how to maximize their cash holdings for greater returns without increasing the risk profile of their money.

Average Asset Allocation For High Net Worth Investors

Based on the pie chart below, folks sitting on a treasure trove north of $3 million in investable goodies typically park 55% in stocks, 21% in bonds, 15% in cold hard cash, 6% in alternative investments, and the remaining 4% in a category labeled "other." Now, suppose we peek into my financial cookie jar. In that case, you'll notice I'm playing a different tune—30% of my stash is in stocks, with a hefty 50% in real estate, and the rest split evenly between alternatives and bonds at 10% each, especially after bond interest rates got a bit more interesting.

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I'm currently trying to shuffle my real estate chips from the physical world into private real estate crowdfunding. Why, you ask? Well, I'm all in for raking in some dough without lifting a finger and diving into the burgeoning real estate scene in the heartland. Up to now, I've funneled a cool $810,000 into this real estate crowdfunding adventure.

Asset Allocation Across Four Generations of Affluent Respondents

Asset Allocation Across Four Generations of Affluent Respondents

Even more fascinating is how the asset allocation for high-net-worth individuals varies across different generations and splits between men and women.

Millennials: Ages 21 – 37 (Born 1981 – 1997)

Generation X: Ages 38 – 53 (Born 1965 – 1980)

Baby Boomers: Ages 54 – 72 (Born 1946 – 1964)

Silent Generation: Ages 73+ (Born before 1946)

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Insights from the second chart regarding how assets are distributed

Insights from the second chart regarding how assets are distributed
  • Men lean a tad more towards stocks than women in their investment choices.
  • In 2018, all age groups, except the Boomers, upped their stock stakes, hinting at a possible contrarian signal.
  • Millennial and Gen X investors were notably bold, beefing up their stock game while cutting down on cash reserves.
  • Yet, millennials are sitting on a cash pile of 21%. Given the rising inflation and the paltry 0.1% – 0.4% returns from many bank money market accounts, they're missing out on significant growth opportunities. CIT Bank's Savings Connect accounts could be a game-changer for those eyeing a plush yield in online savings, offering an earning capacity 15 times above the national average.
  • Surprisingly, the Silent Generation holds the crown for the most robust stock allocation.

After a stellar 2017, it's no shocker that most groups felt bullish about stocks. Millennials, who've mostly witnessed economic sunshine since 2010, are in a prime position. Despite kicking off their adult life in a recession, their investment journey started a tad later.

With millennials stepping into their peak earning phase, their savvy grasp of long-term investment benefits leads to a greater lean toward stocks.

Moreover, millennials are hitting the real estate market hard, showing a growing fondness for real estate syndications, marking a shift in investment preferences.

Examples of alternative investments

Alternative investments are unique, offering many options beyond the typical stocks and bonds. Here's a rundown of some joint alternative investments:

  • Art
  • Cars
  • Coins
  • Cryptocurrency
  • Hedge funds
  • Private credit
  • Private equity
  • Rare whisky
  • Real estate
  • Watches

That's a great reminder of advice that even the average Joe or Jane would probably do well to take: According to a survey by the Chartered Alternative Investment Analyst Association, people are supposed to have about 5% of their portfolio in alternative investments.

But the picture is starkly different once you reach the threshold of being millionaires and multimillionaires. A KKR survey pointed out that in 2020, investors with a minimum of $1 million worth as their net had 26% of it parked in alternative investments.

And the ultra-wealthy—with more than $30 million to their names—50% of those assets are in alternative investments.

The Performance of Luxury Goods as Alternative Investments

The Performance of Luxury Goods as Alternative Investments

As per the Knight Frank Luxury Investment Index, that reflects a 137% gain in luxury item appreciation in the last decade, up to 2022. But of course, there will be just some that have a clear lead in performance. Of particular note, for example, rare whisky was up 373% over the last decade in comparison to the more sedate changes of furniture at 34% and colored diamonds at 16%.

Nevertheless, even with good potential for appreciation, luxury is not usually part of alternative assets in many wealthy investors' possessions, which may be for several reasons.

Luxury goods are illiquid. They can be expensive and time-consuming, even in small quantities.

These are risky and relatively unregulated. For instance, the counterfeit art issue goes back centuries, with the rule rather than the exception being that sales were not reported. Historical data for particular items can be lacking.

Some luxury goods can incur significant maintenance and upkeep costs over time.

Exploring Digital Assets as Alternative Investment Options

Exploring Digital Assets as Alternative Investment Options

Cryptocurrencies have been hanging on the peripherals of an investment option for years but received significant attention only in 2020. However, the journey has been rough for them, with valuations gyrating and many crypto exchanges folding, leading to doubt in investors' minds regarding its long-term stability as a choice for investment.

Rich people are also attracted to cryptocurrency. Knight Frank predicts in 2022 that an asset portfolio is one held in cryptocurrency at 3% and trailing other alternative investments at 5%, such as art, cars, and wine.

Knight Frank says high-net-worth individuals consider this investment category the riskiest and most uncertain. While 59% of this group declares that it already invests in art, only 34% consider the NFT market its potential investment.

The Rising Potential of Alternative Investments for Expansion

The Rising Potential of Alternative Investments for Expansion

In the meantime, Preqin is projecting an even more optimistic growth of alternative assets; Preqin is the world leader in alternative investment data and analytics. According to Preqin, this will balloon to an impressive $23.3 trillion by 2027.

This is no casual uptick; this represents an enormous 470% rise from the $4.1 trillion managed in 2010, a decade-plus of significant growth and investor confidence climbing into alternative assets. The most exciting trajectory would be from 2021 to 2027: assets under management are expected to surge by 70% from $13.70 trillion to $23.3 trillion. This growth rate underlines just how dynamic the alternative investment market is. It points to a monumental change in how investors view portfolio diversification. This move toward alternative investments mirrors broader changes in the financial landscape, where investors are adopting non-traditional assets more than ever because of the likely possibility of giving excellent returns and adding diversity to the portfolio.

The move to alternatives is not a chase of higher yields but a way to invest with strategy, acknowledging there can be value in diversification for long-term financial stability and growth. In the lead-up to 2027, further, reach by alternative assets looks to redefine investment strategies in a new era of finance.

Major Asset Allocation Shock

What genuinely astonishes me is the hefty 61% stock allocation maintained by individuals aged 73 and older. It's remarkable, considering these folks have weathered numerous financial seasons yet remain steadfast in their investment approach.

This nugget of wisdom underscores a valuable lesson: the virtue of perseverance in the investment realm, especially when the stock market hovers near all-time highs. It appears that, through years of experience, these seasoned investors have embraced the philosophy that long-term commitment pays off in the financial markets.

Of course, had we been discussing the average American septuagenarian—perhaps with under $200,000 stowed for retirement—such a bold move toward stocks might have seemed like a necessary strategy to maximize returns. But we are talking about high net worth, meaning at least three million dollars in investable assets. We're not talking about people pinched for money.

It's crucial to differentiate here: we're not referring to the aggressive 70% to 100% stock allocations often suggested to the younger crowd by financial advisors. Instead, we're highlighting a balanced 60/40 stock-to-bond ratio, a strategy that has not only stood the test of time but also demonstrated resilience and comparatively less volatility during economic downturns, as reflected in its historical risk/return performance.

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Returns from Traditional Portfolio Mixes

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I would be happy to have this average annual return of income of 8.7%. The money would be doubled after about 8.3 years of earning. I tend not to pin high hopes on such a number with the stock market in the current phase. In this regard, you would probably come back to the question, is it reasonable to predict an annual rise of about 8.7% for the next ten years? Moreover, politics and economic fluctuations in this case made venture capital subject to much more uncertainty and variables.

Pondering the immobility of the stock market during the decade of 2000 after the dot-com bubble somehow invokes prudence in the mind. In 2022, this currency yielded negative trends, and there has been an uptick in interest rates, so you cannot put forth a bullish approach to future projections much. Throwing venture capital into the mix brings a new set of considerations not only to this kind of undertaking but also to those associated with its characteristics, such as risk and the possibility of generating a high rate of return.

Most of the ultra-wealthy are likely seniors by now. So, if your investment portfolio is bulging and, simultaneously, brimming to the seams with over 30 big ones, you are most definitely in a situation that many are sure to envy. In short, you would still be sitting pretty if the market took a massive nosedive. In fact, for such people, the venture capital they might pour into their portfolios would be an indispensable possibility of tapping the growth potential present in emerging companies and sectors, which is available despite the general uncertainties of the market.

For individuals aged 73 and up, boasting portfolios exceeding $30 million, the prospect of depleting their wealth becomes increasingly remote. It appears that members of the Silent Generation might be adopting a more relaxed stance towards their financial resources, having enjoyed a comfortable cushion for many years. Even for them, venture capital could diversify their investments further. However, they may prioritize stability and legacy over venture capital investments' high-risk, high-reward nature.

Their perspective often evolves at this juncture, with wealth taking a backseat to the richer experiences life offers. Having witnessed the ebb and flow of affluence, their focus may naturally shift towards cherishing moments with loved ones and establishing a meaningful legacy, embracing a broader understanding of life's value beyond mere financial success. This might influence how they view the role of venture capital in their portfolios, balancing the pursuit of wealth with the desire for meaningful, impactful investments.

Persist and Continue Your Investment Journey

This study should serve as a motivational boost for those considering long-term stock investments. You don't need an excessively stock-heavy portfolio, but a stock allocation ranging from 51% to 100% is advisable, tailored to your age and financial aspirations.

Currently, I'm content with a 55% allocation in stocks and a 10% commitment to alternative investments at this stage of the economic cycle. As your wealth escalates, market swings can be pretty unsettling. This quest for stability draws me towards alternative investments, known for their lower volatility.

I aim to secure a 5% to 6% annual return, prioritizing low volatility. My strategy for achieving this steady growth involves a mix of broad diversification and investing in private real estate syndications. The current appealing yields of over 5% on Treasury bonds and CDs are also part of my strategy.

I advocate for real estate investments as a potent wealth-building tool for many Americans. Personally, as someone with substantial assets, I've allocated about 50% of my wealth to real estate, which increased from 40% following the purchase of a home that I intend to keep indefinitely, a decision made at the pandemic's onset.

Investing wisely to align with your risk tolerance is crucial for peace of mind. The goal is to manage your investments so they don't overshadow your daily life, allowing you to relish each day to the fullest. Here are some strategies I recommend for augmenting your wealth.

Is There An Innovative Real Estate Investment Strategy?

Your real estate status turns into a neutral position when acquiring your first dwelling. It's your living space, so you are coasting with the ebb and flow. Truly having stakes in real estate above mere residency means owning more properties as investments.

That's no secret—real estate is the first asset class choice for the rich. I have noted one thing among HNWIs—a considerable share of the portfolio is in real estate. It is attractive due to its relative stability, utility value, and income-generating potential. The dual benefit of rent escalation and value property increment is a potent formula for wealth accrual.

It is an option for a more laid-back investor. In 2017, after the birth of my first child, I decided to part ways with the headache of rental property and redirect $550,000 of the sale proceeds into real estate crowdfunding, embracing a more hands-off investment style.

Contentment with Alternative Investment Choices

According to recent findings from EY, younger and more affluent investors tend to show a higher level of contentment with the outcomes of their alternative investments.

The survey reveals that 63% of millennial participants express satisfaction with the returns on their alternative investments, in stark contrast to the 40% satisfaction rate among baby boomers.

In terms of financial status, 45% of the so-called mass affluent group reported being pleased with their alternative investments, while this figure jumps to 63% for very-high-net-worth individuals and climbs even higher to 69% for the ultra-high-net-worth category.

In summary, nearly half (48%) of all the respondents in EY's survey indicated that they are satisfied with the performance of their alternative investments.

Contentment with Alternative Investment Choices

The results of the EY survey show that the difference in perception between diverse demographics regarding the value of alternative investments makes for exciting reading. A fact particularly interesting about this same generation, often described as unique in the way they approach finance and investment, is that they find themselves satisfied with outcomes from alternative investments at an even higher rate than the more conservative baby boomer generation—63% compared with 40%, respectively.

This divergence may represent broader generational shifts in investment strategies and risk tolerance. For instance, younger investors tend to be generally open to alternative investments' dynamic and potentially higher-risk nature. Such trends underline the changing landscape of investor preferences, whereby the young breed of investors takes more interest in non-traditional classes of assets to build diversified portfolios and possibly good returns, even at the expense of higher risks.

Again, across the rich spectrum, the data showed an unambiguous indication regarding the correlation between net worth and satisfaction with alternative investments. It showed increased satisfaction from the mass-affluent to the ultra-high-net-worth categories of investors regarding the returns that alternative investments bring about as their wealth escalates. With these investment vehicles, ultra-high-net-worth individuals have the highest satisfaction level, 69%.

This could be because the potential to access a greater variety of alternative investment sources is more likely through managing financial literacy and its associated complexities with such investments. Altogether, the results indicate that alternative investments are making a clear, and possibly profound, niche within the portfolios of the richest of the wealthy investors, who are variously enthused, again to point to the fact that investment satisfaction and success are individualized affairs.

Contentment with Alternative Investment Choices

In summary, effective asset allocation for UHNWIs involves balancing a diverse portfolio that includes equities, fixed income, real estate, and alternative investments. The key to optimizing such a portfolio lies in strategic diversification, judicious risk management, and the incorporation of non-traditional investments to enhance growth and stability. By focusing on these principles and adapting to the evolving landscape of investment opportunities, ultra-high-net-worth individuals can safeguard and grow their wealth across generations.

Ultimately, the goal is to create a lasting legacy that reflects both financial acumen and a deep understanding of the broader economic environment.

Market volatility dictates the precise UHNW asset allocation in a significant way because it has a bearing on the risk and return profile of the asset classes comprising a portfolio. Most UHNWIs diversify their investments to protect and ease the risks accruing from market fluctuations, spreading out to different asset classes, such as equities, fixed income, real estate, and alternative investments, to avoid negative impacts on their portfolio arising from downturns in one market.

Money market funds are what the world's most affluent have, and have at a substantial net worth. They are used as instruments to give liquidity and stability regarding asset allocation. The one I have in mind demonstrated returns for a substantial fund and provided the capital access ability and stability that come with this capital opportunity. On the other hand, the interest rate will be lower than the expected growth level.

Ultra and high-net-worth individual asset allocation in the US to 2023—UHNWIs are expected to continue holding relatively concentrated portfolios, with up to 80% of the total value of assets being distributed between alternatives and equity securities by 2023.

What it generally takes to be called an UHNWI is having $30 million in assets and more.

The table above shows that ultra-high net worth investors have almost half of their money invested in investments as alternatives. In contrast, little money is invested in both domestic and international equities. Conversely, the average investor would generally have his portfolio range from 50 to 90 percent invested in stocks.

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