With increasing wealth, high net worth individuals face the challenge of sustaining portfolio growth while managing complex financial situations. The investing strategies for high net worth must evolve beyond conventional approaches to encompass sophisticated solutions. This article explores the best practices for high net worth investing.
Customize the asset allocation strategy
The core principle for high net worth investors is to customize the portfolio asset allocation and investment selection based on personal goals, constraints and preferences. Blanket strategies like target-date funds are insufficient. For instance, alternative investments like hedge funds and private equity can boost returns, but require rigorous evaluation of risks, fees and liquidity needs.
Prioritize portfolio tax efficiency
With greater assets, taxes drag more on net returns. High net worth investors should analyze their marginal tax rates, time horizons and income requirements to improve portfolio tax efficiency. Strategies include holding assets with lower turnover, tax-exempt municipal bonds, locating assets favorably across taxable and tax-deferred accounts, tax-loss harvesting, and donating highly appreciated investments.
Leverage alternative investments
Alternative investments like hedge funds, private equity, venture capital and real estate allow tapping into return streams beyond conventional stocks and bonds. With higher risk tolerance and access, high net worth individuals can potentially earn equity-like returns with lower volatility via alternatives. However, the due diligence is vital given complex fee structures, liquidity constraints and opacity of these assets.
Use portfolio overlays and derivatives
Portfolio overlays with derivatives allow managing investment exposures over time independent of the underlying assets. This enables high net worth investors to maintain target allocations flexibly amid volatility. Derivatives like options can also hedge downside risk. But derivatives introduce counterparty and leverage risks requiring close monitoring.
Consolidate with a family office
Above a certain wealth threshold, it becomes prudent for high net worth individuals to establish a dedicated family office for stewarding wealth across generations. The family office consolidates investments, manages costs, oversees tax and estate planning, and provides concierge services like bill payments – thus integrating complex finances under one roof.
Best practices for high net worth investors center around customization, alternatives, tax efficiency and consolidation. With bespoke strategies and access beyond traditional investments, high net worth portfolios can potentially achieve better risk-adjusted returns.