Contrary to some opinions, high net worth individuals may not be saving every penny. Nor do these accomplished individuals pay for everything in cash. The truth is many high net worth individuals invest the vast majority of their money as opposed to leaving it in a savings account. However, the manner in which high net worth individuals invest is not exactly the same as the approach of those who have less money.
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High net worth individuals have the opportunity to amass a considerable amount of money through a wide variety of investment vehicles, potentially setting the stage for their money to generate substantial returns. The most successful high net worth individuals might make just as much or even more money through the prudent allocation of their investing dollars as they do at their 9 to 5 day job.
Let’s take a closer look at strategic investments for high net worth individuals:
How High Net Worth Individuals Allocate Assets
Some high net worth investors worth several millions of dollars may distribute their money in equities (stocks, mutual funds, and ETFs), bonds, alternative investments, liquid cash, and other investments. Oftentimes they will hold the least amount in cash and may invest the majority of their money in equities. The reason is that money typically loses value while sitting in a bank account due to inflation. It may make more sense to invest half or more of one’s money in equities as they typically have a higher rate of return than other investments for high net worth individuals.
The risk posed by equities is oftentimes offset by investing in bonds, money market accounts, CDs, and other comparably low-risk investment vehicles. The moral of this story is high net worth individuals understand the path to continued riches is to make their money work hard for them and when appropriate take calculated risks.
However, selecting the best investments and balancing risk while diversifying is easier said than done. This is precisely why many high net worth individuals rely on a fee-only fiduciary CERTIFIED FINANCIAL PLANNER™ Professional for guidance with their financial planning.
A Commitment to Portfolio Rebalancing When Necessary
High net worth individuals who continue to grow their nest egg may also emphasize portfolio rebalancing. Rebalancing involves targeting the optimal balance both in terms of investment diversification as well as risk diversification. Ongoing rebalancing may provide invaluable peace of mind along with an objective of achieving optimal returns as it ensures assets are allocated in the most prudent manner based on economic factors as well as personalized goals for investment returns and risk tolerance levels.
Your CERTIFIED FINANCIAL PLANNER™ Professional will help you successfully rebalance your account, ultimately preventing your investment portfolio from skewing too far in one direction. A truly balanced portfolio has a blend of stocks, mutual funds, index and exchange-traded funds, bonds, cash, and other investment vehicles based on the individual’s tolerance for risk and age. Meet with your CERTIFIED FINANCIAL PLANNER™ Professional and discuss the optimal frequency for rebalancing your portfolio, be it annually, quarterly, etc.
High Net Worth Individuals Lean Toward Equities
Most people are surprised to learn the average high net worth individual may have a considerable amount of money invested in the stock market in equities (stocks, mutual funds, index, and exchange-traded funds). It may also not be uncommon that high net worth individuals age 73 and older have more of their funds allocated toward equities.
Though the stock market certainly has the potential to fluctuate, it is still one of the better investment avenues simply because its potential returns are likely superior to those of other investment vehicles.
However, there is a caveat of note in regard to high net worth individuals investing in the stock market in that these individuals are not allocating the entirety of the money they invest in particularly risky investments. Rather, many of these investments pay consistent dividends, are value-orientated, or are comparably low-risk. The proper balance between high-risk, moderate-risk, and low-risk investments is essential to protecting a high net worth individual’s nest egg.
Above all, High Net Worth Individuals Stay the Course
While many investors with smaller nest eggs often panic when the economy stalls or stocks plunge, many high net worth individuals make a commitment to stay the course. These savvy investors are well aware of long-term trends that make it clear the stock market is likely to bounce back. This means high net worth individuals are typically laser-focused on the end game which is consistent returns on investments across the long haul as opposed to many retail investors who may be more focused on short-term variability and short-term gains.
In general, it is sensible for high net worth individuals to have money in stocks, mutual funds, and ETFs. However, your unique age and financial goals will ultimately determine your portfolio’s balance. Lean on the expertise of a financial advisor that specializes in working with high net worth individuals, don’t rush when making those decisions, commit to the long haul by staying the course and your nest egg will most likely gradually expand.
The overarching goal across posterity is to earn a reasonable and competitive yearly return that supports the achievement of your life goals and objectives while managing volatility and risk. However, there will be some down months, quarters, and potentially even a couple down years across the decades to come.
These disappointing quarters may be offset by quarters with higher than expected returns. Consult with your financial advisor as often as necessary, continue to rebalance your investment portfolio based on this professional guidance and overlook those temporary market fluctuations in favor of a focus on long-term performance.
At Financial Freedom Fee-Only Wealth Management, we have over 55 years of experience working with high-net-worth individuals and couples. We are a fee-only, fiduciary, wealth management firm dedicated to helping our clients protect, grow, and maximize their wealth.
Contact us today for a complimentary consultation, and find out if we are the right fit for your needs.