Paladin – 5 Investment Strategies For High-Net-Worth-Individuals


High net worth individuals (HNWIs) are people with liquid assets in the range of $1 million and $5 million. What sets individuals with a high net worth apart from others is not just how much wealth they have, but also how they approach wealth creation and protection.

With sizable wealth comes the more complex financial planning, and the risk of quicker wealth erosion through expenses and taxes. Small mistakes in managing finances may have a significant impact on the wealth of HNWIs, which makes it imperative for them to strategize well and not be passive about maintaining it.

There are simple strategies that HNWI must know of and implement that can help them enhance their portfolio and increase the returns from their investments. When you are an investor with a high net worth, you will probably need to give additional attention to money matters, which is also why you may want to explore wealth management or portfolio management services rather than just financial planning. Through specialized and customized strategic plans for investments, your financial advisor may be able to establish further streams of income that may lift and protect your wealth over time.

Why strategic investment is crucial for high-net-worth individuals

The scope of financial matters that high-net-worth-individuals have to consider when looking at wealth appreciation is much more – be it taxes, retirement planning, or even estate planning. They may be constantly looking for ways to protect the wealth they have gained over the years.

But what about growing this wealth further?

While some HNWIs prefer a conservative route and explore debt or mutual fund markets, some others are open to exploring even the riskier asset classes like PE or hedge funds; some even invest their wealth in new age avenues such as cryptocurrency or NFTs. However, there is no one-size-fits-all approach possible in the financial space. There are far too many moving factors that influence individual cases and, therefore, the outcome.

Given the investible amount is large for HNWIs, the risk is much higher. That is why strategic investment decisions are important for HNWI. Remember, the key to becoming ultra-wealthy and making sure money doesn’t run out is a top-notch investment strategy. Of course, there are simple mistakes that several billionaires will tell you to avoid. The number one rule in Warren Buffett’s words is not to lose money. That further reinforces the need for a sound investment strategy.

How high-net-worth individuals have been investing their money

There has been a drastic shift in the way HNWIs have traditionally been investing their money over the years. A recent study found that high-net-worth-individuals with investable assets worth $3 million invest their money primarily in stocks and bonds, with a smaller percentage allocated to cash and alternative investments. 

Additionally, while older generations have traditionally been conservative by sticking to investing in stocks, and have just about started to increase the portion of investment in stocks and bonds, the younger millennial population is quite adventurous with a larger portion of their investment made in stocks, exposure to alternate investments and a reduced allocation in cash.

Let us now explore the best investment strategies that HNWIs can benefit from.

5 investment strategies for high-net-worth individuals to protect and grow their wealth

1. Fool-proof asset allocation strategies

If there is an investment strategy that all investors irrespective of scale and duration of investment swear by, it isasset allocation.Asset allocation refers to the planned split of investible funds between various asset classes that have low correlation such that the portfolio grows while also protecting the capital. Equity and Debt are the most popular choice for asset allocation, though it is not limited to these options.

An aggressive asset allocation strategy has the potential to fetch significant returns for investors when the market is on an upswing; however, the risk is also high. A balance needs to be struck between equity and debt to buffer one’s portfolio. For instance, expert financial advisors generally suggest a 60/40 asset allocation for high-net-worth-individuals. There can be a mix of traditional investment vehicles, high-risk and low-risk investment instruments. This way, you will only reduce risk but also adjust and rebalance your portfolio over time after learning what works and what doesn’t.

2. Buying and holding growth stocks

A growth stock can be defined as a business stock that has displayed above-average returns and shows further promise to grow dynamically. This space, however, can be tricky and requires careful study and analysis of the company, as well as the industry, to make research-backed picks for the portfolio.

Once you have that (from your qualified investment advisor), HNWIs may buy and hold onto growth stocks for the long run. The taxes on holding a stock for the long term are also lower, making growth stocks a great investment strategy for HNWI.

This strategy can be applied to any investment even though it is most suited to equity as an asset class. Over time, the market always trends upward. Look at where Wall Street was in its inception in 1792, and look at where it is now. Disregarding the short-term fluctuations, the journey has been a steep upward curve! Similarly, the prices of goods and commodities have also risen over time. Consider the price of gold or oil or even real estate! A long time horizon is a great strategy for investors, especially HNWIs, for wealth appreciation.

3. Rollover of an IRA into a Roth IRA

Unfortunately, the IRS does not allow you to open a Roth IRA if your earnings are too high. However, there are still benefits to having a Roth IRA.

One way for HNWIs to get a Roth IRA is through a process called the backdoor IRA. HNWIs may open a traditional IRA, accumulate funds in it through a majority of the earning years, and roll it over into a Roth IRA. This way, you can have a retirement savings account that is tax-free upon withdrawal and one that also has benefits when it comes to estate and legacy planning.

4. Tax-free municipal bonds

High net worth individuals with large savings can invest in tax-free municipal bonds and papers issued by the Government to finance Government-run welfare and infrastructural projects. The interest earned on these schemes is tax-exempt and has a high yield. In a sense, the return on these funds will be high, while the bonds tend to be a safe investment. Not only can high-net-worth-individuals use these funds to diversify their portfolio, but they can also gain tax-free income in the short term and re-invest it further.

5. Efficient tax planning

Managing taxes aggressively is perhaps the most burdensome yet most essential investment strategy for an HNWI. Everyone has to deal with the bane that taxes are in our lives. For HNWIs, tax planning becomes increasingly important since their income already qualifies for the top tax rate. This may go well beyond 40%, should the latest tax proposals go through Congress. As wealth grows, the tax liability grows. With the lack of a smart tax-saving strategy, high-net-worth-individuals must be prepared to pay more to Uncle Sam in the form of high taxes.

5 mistakes high-net-worth-individuals must avoid while investing

1. Having a do-it-yourself attitude

There is no doubt that individuals with a high net worth are accomplished, smart, and possess the intelligence to build wealth and invest money. However, with a lot of money comes a lot of risks. Therefore, it is recommended that high-net-worth-individuals let go of the fact that no one else can do the job better than them. Some seasoned professionals have helped countless HNWIs increase their wealth over a short period. Sure, it can be a little difficult trusting someone else with your hard-earned money. But you will realize that hiring a professional is a fantastic decision that ends up giving you great returns and extra time on your hands!

2. Following the herd

One mistake that a lot of HNWIs make is to compare themselves with other ultra-rich billionaires and follow what they have had to say. While it is great to draw inspiration from what self-made billionaires say, one must always make decisions that best suit THEIR circumstances.

Following the crowd when it comes to making investment decisions can be a criminal mistake since the finances of 2 different individuals will never match. HNWIs must do research, analyze the decisions of other HNWIs but never try to copy their decisions. Remember, you have your own financial goals that someone else may not have. Foregoing this type of competition is important for growing personal wealth.

3. Put all your money in one asset

Not abiding by the asset allocation principle is a mistake that many HNWIs are guilty of! Some investors are guilty of finding one investment instrument that gave them great returns in the summer of 2005 and investing all their funds & savings in it. This can easily wipe out your savings in the worst-case scenario. Some HNWIs may also invest only in stocks and bonds. This concentration can be lethal in case of a market swing in the other direction.

4. Discounting market volatility

 One cannot assume that markets will always act rationally. When you discount the highly volatile nature of markets, you are stepping into financial gloom and doom that will not end well for you. Yes, markets are resilient, but their volatile nature can also lead to insurmountable losses.

5. Investing only in U.S markets

The European and American markets are considered the most secure when it comes to investments because of the advanced technology-based practices of these developed economies. However, HNWIs need not limit their investments to these markets only. Emerging markets offer opportunities that established markets cannot. Indonesian and Singaporean markets, along with other Asian markets such as India have been exhibiting resilience and tremendous potential for growth over the past few years. So much so that they have become ripe for the picking for the ultra-wealthy investors.

To conclude

While a lot of high-net-worth-individuals use a DIY investment strategy, they might be missing out on many opportunities. Having the status of a high-net-worth-individual has both challenges and benefits. However, high net worth investors can use the services of a professional financial advisor – a fiduciary advisor – to plan investment strategies that are not one-size-fits-all but carefully crafted strategies to suit you.