If you want to get rich, you might as well see how high net worth individuals invest. Specifically, it’s good to see their asset allocation breakdown.
In a previous post we learned that the wealthier one gets, the larger the business component in the individual’s net worth composition. Once you hit a net worth of $100 million, the business component reaches roughly 50% of net worth. Although most of us will never reach such levels of wealth, it’s obvious you should start a business if you hope to get really rich one day.
But what about zeroing in on the public investment portion of a high net worth investor’s wealth. A high net worth investor is defined as someone with $3 million or more in investable assets, not including the value of their primary residence. A ultra high net worth investor has $30 million or more of investable assets.
What are some insights we can gather from their asset allocation that may be most relevant to readers here? After all, everyone can invest in stocks and bonds, but not everyone has the capability or the drive to build a business.
The good news is that U.S. Trust, the Private Wealth Management arm of Bank of America put out a 2018 High Net Worth investor survey consisting of 892 high net worth and ultra high net worth adults across the United States we can analyze.
Average Asset Allocation For High Net Worth Investors
According to the pie-chart below, the average asset allocation for respondents with over $3 million in investable assets is 55% stocks, 21% bonds, 15% cash, 6% alternatives, and 4% other.
Ah hah! I thought I was being a little too conservative with my 55% stock allocation in my 1H2018 Financial Samurai investment recap. But in reality, I am slightly more aggressive than other high net worth investors because I only carry a 6% cash balance, have 10% of my investable assets in Alternatives, and have closer to 34% in bonds after the 10-year bond yield broke 3%.
What’s more interesting is how the High Net Worth asset allocation is broken down by generations and between men and women.
Four Generations Of Respondents:
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)
Some key points from the second chart:
* Men are only slightly more aggressive than Women with their stock allocation
* Every age group except the Boomers increased their stock allocation in 2018, which could be a contrarian indicator
* Millennials and Gen X were the most aggressive in increasing their stock allocation and decreasing their cash allocation
* Millennials still have way too much cash at 21%, but that’s not terrible if they are taking advantage of much higher money market (1.85%) and short-term CD rates (2.5%) thanks to the Federal Reserve raising rates since 2016
* The Silent Generation has the most aggressive stock allocation of them all
After a great 2017, it’s understandable that most generations increased their stock allocation. If you’re a Millennial, you’ve mostly seen good times since 2010. Even though you may have graduated college during the recession, you had no money to invest for the first two years anyway.
Now that Millennials are entering stronger earning years and are better educated about the benefits of long-term investing, the trend towards higher stock allocation should continue.
Biggest Asset Allocation Surprise
For me, the biggest surprise really is how those ages 73+ have a 61% allocation towards stocks. 73+-year-olds have seen it all, yet they are still undeterred. This is very insightful because it seems experience has taught them that staying the course long term is the way to go despite the stock market being at close to record highs today. To them, long-term investing has been proven correct.
It would be one thing if the 73+ year olds represented the average 73+ year old American with less than $200,000 in retirement savings. Having a more aggressive stock allocation might be more necessary to generate higher returns. But these are high net worth individuals with at least $3 million in investable assets, so they are not hurting for money.
But please note we’re not talking about the 70% – 100% aggressive allocation in stocks that most financial advisors recommend for younger folks. We’re talking about a classic 60/40 allocation that has proven to perform quite well and to be less volatile during downturns. See the historical risk/return performance below.
Historical Portfolio Composition Returns
I would happily accept an average return of 8.7% for the rest of my life. That would mean my investments would double every 8.3 years. However, I have doubts that at this point in the cycle, we’ll be returning 8.7% a year for the next 10 years. Remember, there was an entire lost decade of stocks after the dotcom bubble burst in 2000.
It’s safe to assume the largest percentage of ultra-high net worth individuals are from the oldest generation. Hence, if you have over $30M in investable assets, you’re already so far ahead of the game that even a 50% correction still leaves you with plenty of assets remaining.
Further, if you’re over 73 years old, you’re probably not going to be able to spend all your $30M+ before you die. Hence, perhaps the Silent Generation is taking a very casual attitude towards money because it realizes life is way more meaningful than money since they’ve had so much money for so long. At this stage of life, it may be more about family, friends, and leaving a legacy.
Stay The Course
This survey should give people the confidence to invest in stocks for the long term. Your portfolio doesn’t have to be wildly overweight stocks, but you should probably hover between a 51% – 100% weighting depending on your age and your financial goals.
I’m personally happy with a 55% weighting in stocks and a 10% weighting in alternatives at this point in the cycle. I already experienced what it felt like to have a 70% weighting in stocks when the market dropped 10%, so I’ve adjusted accordingly.
My long-term goal is to earn a 5% – 6% annual return with low volatility. The way I plan to achieve these steady results is through broad diversification and investments in private real estate syndication.
I truly believe investing in real estate is one of the best ways to build wealth for most Americans. As a high net worth individual myself, I have roughly 40% of my net worth in real estate.
Below are my recommendations to build more wealth.
Track Your Finances Diligently
Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software.
In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing.
I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Invest In Real Estate
Once you’ve purchased your primary residence you are considered neutral real estate. Since you have to live somewhere, you will simply ride the real estate cycle. To be long real estate you must own investment property in addition to your primary resident.
If you’re interested in a hands off approach to real estate investing, consider investing in a publicly traded REIT or in real estate crowdfunding. Once I had my son in 2017, I decided to sell my PITA rental house and reinvest $550,000 of the proceeds into real estate crowdfunding. My favorite two real estate crowdfunding platforms are:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
Both platforms are free to sign up and explore.