Asset allocation in 2016

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World Wealth 2016: Asian, Digital, Social - Capgemini - UHNWI.org
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Just read the recent Capgemini's World Wealth Report (summary here) in order to learn the millionaires' experience, and two issues on asset allocation I dont understand. Probably someone can clarify:

1. HNWIs focus more on alternative investments and less on liquid assets
Why would they favor alternative investments instead of stocks/bonds? Better returns? What alternative investment should I consider? (less than USD 80K investable assets currently)

2. Younger HNWIs are even more inclined to favor bank accounts and cash over the services of wealth managers.
This one I dont understand at all. With rates way lower than bonds (in the US) and with an obvious trend to negative interest rates in Europe, why would anyone with big sums of money prefer bank accounts?

Thanks for any ideas.

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Fatcashboy said:   2. Younger HNWIs are even more inclined to favor bank accounts and cash over the services of wealth managers.
This one I dont understand at all. With rates way lower than bonds (in the US) and with an obvious trend to negative interest rates in Europe, why would anyone with big sums of money prefer bank accounts?
 

  
High Net Worth Individuals in their late 20s/early 30s would have attended college at a time when A) Credit Cards were incredibly easy to obtain or B) Credit Cards weren't allowed.  Then they entered the job market during the 2008 recession and aftermath.  Interest rates and inflation have been low their entire adult life.

Consider the ramifications of that.  They either watched their friends rack up 5 figures of credit card debt just in time to have the job market tank, or they heard horror stories of credit card debt and avoided them entirely.  They base their financial decisions entirely on their bank account balance, because that's what they've always done since gaining financial independence.  By this, I mean a very basic mindset - Low account balance = spend less, High account balance = spend more.

That strategy worked just fine for them for their entire lives, so they never learned more complex information about investments.  Most people's first lesson on compound interest is their savings accounts - for most young HNWI, savings accounts have yielded around 0.1% their entire adult lives, and inflation was a non-issue.  For them, managing money was only about controlling spending.  Compare that to someone who was an adult in the hyper-inflation days of the 70s, when a person could earn 9%+ in a CD.  

These are all generalizations, but based on my experience at a tech company, this describes a lot of my coworkers.

The real question you should be asking yourself. Is there a benefit to emulating the investment style of High Net Worth Individuals? The answer is generally a resounding no. The average HNWI under performs an equivalent asset allocation of efficient marketable securities.

It is a persistent myth that the wealthy get richer because they have investment opportunities that are better than the average American. Two classic cases are IPOs and Hedge funds. People are seduced by the few rock star winners and don't notice the multitude of failures.

In the case of Hedge Funds, their recent performance is atrocious. Have you heard of Warren Buffet's $1M bet that the S&P 500 index will beat five of the best hedge funds. since 2008 the S&P has returned 66% and the hedge funds 22% and that includes the period including the trash.

This is classic behavioral finance. The belief that you can out perform the market if only you invest in the right stocks, mutual fund, or some "alternative investment". Get a rational asset allocation and invest in index funds you will be far more successful.

btuttle said:   The real question you should be asking yourself. Is there a benefit to emulating the investment style of High Net Worth Individuals? The answer is generally a resounding no. The average HNWI under performs an equivalent asset allocation of efficient marketable securities.

l.

but what about the investment style that made them hnwi?

rufflesinc said:   
btuttle said:   The real question you should be asking yourself. Is there a benefit to emulating the investment style of High Net Worth Individuals? The answer is generally a resounding no. The average HNWI under performs an equivalent asset allocation of efficient marketable securities.

l.

but what about the investment style that made them hnwi?

  
I gotta agree with btuttle here.  Who says they became HNWI through their investments?  I work in Washington DC with some very HNWI and most of them don't have an IRA, use credit cards, or contribute much to their 401ks.  The only reason they're HNWI at all is because they earn more through W2 wages then they spend (or their net worth is mostly from appreciating home value).  

Paraphrasing one friend after I asked him about affording a trip to Denmark - "I just kinda do what I want and my bank account balance keeps going up.  Why, should I do something else with it?"

faloun said:   rufflesinc said:   
btuttle said:   The real question you should be asking yourself. Is there a benefit to emulating the investment style of High Net Worth Individuals? The answer is generally a resounding no. The average HNWI under performs an equivalent asset allocation of efficient marketable securities.

l.

but what about the investment style that made them hnwi?

  
I gotta agree with btuttle here.  Who says they became HNWI through their investments?  I work in Washington DC with some very HNWI and most of them don't have an IRA, use credit cards, or contribute much to their 401ks.  The only reason they're HNWI at all is because they earn more through W2 wages then they spend (or their net worth is mostly from appreciating home value).  
.  

Maybe you have a different idea of very hnwi , but I don't see how any becomes hnwi with w2 income

even if you make 1mm a year, that's only 10mm with no expenses and taxes after 10 years

rufflesinc said:   
btuttle said:   The real question you should be asking yourself. Is there a benefit to emulating the investment style of High Net Worth Individuals? The answer is generally a resounding no. The average HNWI under performs an equivalent asset allocation of efficient marketable securities.

l.

but what about the investment style that made them hnwi?

Here's the boring strategy to make you a hnwi:
Low-cost diversified investments favoring equities.

rufflesinc said:   Maybe you have a different idea of very hnwi , but I don't see how any becomes hnwi with w2 income

even if you make 1mm a year, that's only 10mm with no expenses and taxes after 10 years

Here is what HNWI means for the Capgemini report --- see footnote 
Capgemini said: HNWIs are defined as those having investable assets of US$1 million or more, excluding primary residence, collectibles, consumables, and consumer durables.

ETA: The threshold is only 1 mil. However, it does exclude primary residence.

Go nutunfutz and have 30% stock, 30% bond, 30% bullion, 10% cash rebalance annualy..  If I had enough I would run 2 portfolios one this way and one slice and dice just to entertain myself.

Like most others said, I would guess most young high net worth individuals did not get there by being good with money. They were good at something else or in the right place at the right time (tech ipo) and the money just kind of came. Now they are just interested in holding onto it.

Only when looking at later in life individuals would you see those with higher net worth be those who made it from investing

Fatcashboy said:   2. Younger HNWIs are even more inclined to favor bank accounts and cash over the services of wealth managers.
This one I dont understand at all. With rates way lower than bonds (in the US) and with an obvious trend to negative interest rates in Europe, why would anyone with big sums of money prefer bank accounts?
Aren't bonds prices near record highs right now? A looming rate hike creates downward pressure on the bond prices. Personally I don't think the rate hike is baked into the prices yet, but it's also impossible to predict the future. Bonds could keep going up for all I know. But it shouldn't be difficult to understand why someone might avoid bonds at this point.

Fatcashboy said:   Just read the recent Capgemini's World Wealth Report (summary here ) in order to learn the millionaires' experience, and two issues on asset allocation I dont understand. Probably someone can clarify:

1. HNWIs focus more on alternative investments and less on liquid assets
Why would they favor alternative investments instead of stocks/bonds? Better returns? What alternative investment should I consider? (less than USD 80K investable assets currently)

2. Younger HNWIs are even more inclined to favor bank accounts and cash over the services of wealth managers.
This one I dont understand at all. With rates way lower than bonds (in the US) and with an obvious trend to negative interest rates in Europe, why would anyone with big sums of money prefer bank accounts?

Thanks for any ideas.

  Btuttle hit it on the nail. Most pension funds and state government finally got the clue and started divesting themselves of hedge funds that charged 2% of assets + 20% of returns.
The actively managed portfolio starts off with a significant handicap of expenses and tax efficiency.

As far as #2, the price of bonds moves opposite to interest rates. (A $1000 bond yielding 3% would be worth $925 if rates rose to 4%)
Having a living trust own a jumbo CD would be FDIC insured, and could be surrendered early for a few months interest penalty if rates went up, rather then a 7.5%+ loss on principal.

HNWIs are allowed to invest in instruments deemed higher risk -- too high for the stomach of the SEC.

It makes sense that as one has more to invest, the more they can afford to lose, and the more they can invest in a risky fashion.



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