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Asset Allocation Considerations for the High-Net-Worth Investor

Many believe that asset allocation is the single most important factor impacting investment returns. The famous 1986 investment return attribution study by Brinson, Hood and Breebower showed that asset allocation (not market timing) accounted for up to 90% of portfolio returns.

The typical investor must account for risk tolerance, time horizon and retirement needs when determining the mix of stocks, bonds and cash in their investment portfolio. The High-Net-Worth (HNW) investor may have to account for much more with respect to their personal investment criteria, including a considerably greater number of investment options available to them.

Asset Allocation Overview

Asset allocation involves dividing an investment portfolio amongst different asset categories to minimize risks and potentially increase gains.

The process of deciding which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at a particular point in your life will largely depend on your time horizon and your risk tolerance.

The typical investor is usually concerned with the optimal mix of stocks, bonds and cash. However, HNW investors usually qualify as accredited investors, and therefore have numerous additional investment options available to them, further complicating the asset allocation process.

Investors should seek the help of investment professionals to determine their appropriate asset allocation as this will likely be the one of the most crucial investment decisions they make.

Risk comes from not knowing what you are doing.”  – Warren Buffett

Considerations for Asset Allocation

Questions that investors should ask themselves when establishing their asset allocation include:

  • Am I looking to preserve capital?
  • Am I targeting aggressive long-term compounding?
  • Am I looking for consistent ongoing income to finance my current and future lifestyle?
  • Or, am I driven by a combination of some or all of these?

In addition to these considerations, all investors must commit to a time horizon, usually measured by years until retirement or a life event and driven by personal financial constraints.

As well, investors need to determine what their tolerance for investment risk is. Your investment risk tolerance is your ability and willingness to lose some or a major portion of your original investment in exchange for greater potential returns. Risk tolerance and investment horizon often go hand-in-hand, with risk tolerance decreasing as investment horizons shorten.

All of the above, and especially investment time horizon, will change over an investor’s lifetime and therefore investors should understand that asset allocation is not a one-time decision.

Considerations Unique to HNW Investors

In addition to the considerations common to all investors, HNW investors may have a number of unique and complicating factors including:

  • Accounting for substantial wealth allocated to a business;
  • Adjusting the allocation to recognize a multi-generational time horizon; and
  • Using alternative investments to manage risks and maximize returns

Quite often, a substantial component of a HNW investor’s wealth can be found in a family business. Is the business to be included as a component of the asset allocation? Is the business going to be passed onto the next generation or will it be monetized, creating more investment capital? 

Unlike the general investor with a definitive time horizon, HNW investors may be thinking of themselves as stewards of capital, not just owners of capital. Therefore, wealth is not managed to just last through retirement, but to serve future generations and philanthropy as well.

The risk-versus-return analysis of alternative investments is quite different from that of exchange traded stocks and bonds. Many alternative investments are relatively illiquid, meaning that much analysis and consideration is required before committing to them as an asset allocation component.

Some HNW investors may have the funds to establish several investment portfolios with differing objectives and time horizons specific to the purpose of each portfolio. For example, there may be individual portfolios for: current lifestyle needs, longer-term growth for generational wealth transfer, and income plus capital preservation for philanthropic objectives.

Changing Asset Allocation and Rebalancing

As stated above, a common reason investors change their asset allocation is due to a change in their investment time horizon. For most investors, as they get closer to their investment objective, they may change their asset allocation to lower their risk exposure as their investment horizon decreases. An inheritance, the sale of a family business or the liquidation of capital holdings may also require a complete re-evaluation of a HNW investor’s objectives, time horizon and risk tolerance—and therefore asset allocation.

Rebalancing is also required on an ongoing basis. Over/under-performance of an asset class relative to another over time can cause asset allocation to drift away from the original mix. “Rebalancing” does not mean changing your asset allocation based on a particular asset class’s relative performance, but rather adjusting the asset allocation back to the optimal mix established specific to your personal criteria which includes your risk tolerance.

Obtain Expertise to Determine Asset Allocation

The asset allocation decision for HNW investors can be an extremely complex process. It often requires advice from and consistent monitoring by a team of experts able to make adjustments as market conditions and personal factors change. These experts may include investment managers, financial planners, lawyers, accountants, estate planners, insurance advisors, and philanthropic consultants, among other specialized professionals.

At Bloom Investment Counsel, Inc. we are an investment manager member of many of our clients’ teams of experts. Not only can we help HNW clients with their investment needs, if required, we can also direct them to other specialized experts who we know and work with. 

Visit Bloom’s website to learn more about our investment approach or get in touch with Bloom today to find out what we can do to help you and your family protect, preserve and build wealth without risking future security and legacy goals. The answers to your and your family’s most complex financial questions come when you connect with real people.

Bloom Investment Counsel, Inc. is a well-established Toronto-based independent, privately-owned boutique investment management firm providing customized, actively managed, Canadian and U.S. dividend-paying portfolios for wealthy individuals, family offices, foundations, corporations, institutions and trusts.

Founded in 1985, Bloom has experience in managing in excess of $2.5B in assets over the years. We believe that generating independent cash flow is central to the success of our clients’ portfolios because it provides capital for the present day, if needed, while continuing to preserve and build wealth for the future.

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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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