What budding investors can learn from the investment strategies of the super-rich
The economic slowdown has negatively impacted the fortunes of even ultra-high-net-worth individuals (UHNWIs), but there are still financial lessons to be learnt from their highly effective habits.
Ultra-high-net-worth individuals (UHNWIs) are those considered to have a net worth of at least US$30 million (S$41 million). How exactly do such high rollers invest their wealth smartly with a long-term approach so that it continues to grow for them?
Contrary to popular belief that only the elite know the secrets to sound investments, smart investing strategies usually stem from knowing what financial mistakes to avoid, how to sniff out a good investment opportunity, taking calculated risks, and of course, saving as much as possible.
Here is what financial experts have to say.
CONSIDER YOUR OWN LINE OF WORK
Benjamin Zhaojia Guo, assistant vice president, Treasures Private Client of DBS Bank advises that sometimes an investor’s safest opportunity might be in the business that he or she is already engaged in.
“For instance, if you are in property, then you will be better off investing further in real estate, as it is a known quantity and you already have a deep understanding of how that market operates.”
“If you are in property, then you will be better off investing further in real estate, as it is a known quantity and you already have a deep understanding of how that market operates.” – Benjamin Zhaojia Guo
DON’T PUT ALL YOUR EGGS IN ONE BASKET
Richard Otsuki, chief editor of finews.asia, said: “Even at the US$1 million to US$29 million range (of high-net-worth individuals or HNWIs), it is important never to be subjected to just one or two banks. Investors should always spread assets across multiple banks not only to compare offerings (products, pricing, research or service quality, for example), but because throughout history, banks can and do crash.
“Remember when Lehman Brothers was still holding an investment-grade rating five days before it filed for bankruptcy 12 years ago? This is especially important for those who would like to get a first taste of private banking services but would have to put most or all of their assets with one financial institution.
“With often high minimum ticket sizes, product access can be limited and opening such accounts may provide not much more than bragging rights with unnecessary risks. In many situations, it may be better to be a top client at a super-affluent bank than an average one at a private bank with a high minimum account size.
“All banks assess the total value of their client relationships. Especially in times of need, you may urgently require expert attention or additional flexibility that may not be afforded to you if you are not considered meaningful business.”
“Investors should always spread assets across multiple banks not only to compare offerings… but because throughout history, banks can and do crash.” – Richard Otsuki
HAVE A SOUND SAVINGS STRATEGY
According to Warren Buffet, not losing money and having savings is the golden rule of investing; likewise, UHNWIs will tell you that investing is a dual strategy, made up equally of investments and savings.
The trick to building wealth is to create a gap between earning and spending for years. While one way of holding on to amassed wealth is by not spending any of it, a more realistic approach is to have an effective savings strategy for emergencies and to counter large amounts of investments tied in growth markets.
As Warren Buffet and Bill Gates are proof, many self-made millionaires live below their means, holding most of their wealth in the form of savings. By simultaneously increasing cash inflow while reducing their cash outflows, overall wealth increases.
Paying off outstanding debts is another important savings strategy to avoid wasting money in compounding interest. “Having a managed long-term solution is often ideal for those with limited financial literacy too,” said Guo.
INVESTING IN LOW FEE OPPORTUNITIES
In addition to stocks and bonds, UHNWIs tend to invest in private equity and venture capital funds. They also invest directly in real estate equity, and are sometimes known for being secured lenders in real estate, making them the preferred loan alternative for real estate investors instead of banks.
Such short-term, real estate-secured bridge loans are a popular investment strategy for UHNWIs, as they typically offer higher annual returns. Furthermore, the short-term nature of the loans make them low-risk and of a higher yield compared to more traditional, fixed-income instruments.
Rishabh Saksena, head of investment specialists APAC, Julius Baer said, “In an uncertain macroeconomic environment, security selection through careful risk/return analysis has become increasingly important for both equities and fixed income. This underscores the need for active management for medium- to long-term investments. ETFs (exchange-traded funds) could be looked at for tactical plays, or as underlying in actively managed strategies.”
STAYING FOCUSED ON YOUR OWN GROWTH
This is common sense – the more you save and reinvest, the better off you’ll be in the long term.
While healthy competition is great for spurring motivation, the focus should always be on achieving personal goals and objectives, rather than just beating your competitor by any means possible.
Successful UHNWIs envision where they want to be a few decades later, establish subsequent personal investment goals and then strictly adhere to sound, dependable, long-term investment strategies that will help them achieve that goal.
One of the most common advice wealthy families pass on to their younger generations is to live within one’s means and not flaunt the wealth. Said Guo, “HNWIs are conscious of the need to have a stable return from their portfolio for their retirement. Low volatility financial assets such as REITS or bonds are ideal for such personal, long-term approaches.”
“Low volatility financial assets such as REITS or bonds are ideal for… personal, long-term approaches.” – Benjamin Zhaojia Guo
REGULAR REBALANCING OF YOUR PORTFOLIO IS CRUCIAL
To ensure that their portfolio remains current with suitable diversification and proportional allocations, investors must prioritise rebalancing their portfolio on a regular basis.
This practice helps maximise potential gains on their investment strategies, while also minimising the risk of pointlessly holding onto lagging assets.
“Asset allocation is an import aspect in ensuring that your portfolio meets your investment objectives and matches your risk tolerance. Over time, investment objectives may change and market performance could skew the actual asset allocation. Hence it is important to regularly rebalance your investment portfolio to ensure it is in line with your targeted asset allocation,” added Saksena.
“It is important to regularly rebalance your investment portfolio to ensure it is in line with your targeted asset allocation.” – Rishabh Saksena
INVESTING BEYOND THE US AND EU MARKETS
UHNWIs work hard to determine which emerging markets will best fit into their investment portfolios and their overall investment strategies, irrespective of what part of the world they originate from.
By concentrating investments only in the US and EU markets, investors run the serious risk of overlooking potentially lucrative investment opportunities anywhere else in the world.
According to financial strategists, the most popular way to diversify to an international portfolio is through buying ETFs or mutual funds with foreign holdings. Investors can then choose to invest in three different types of funds. Specifically, international funds; regional or country funds that focus on a certain area or country; and sector funds which focus on a certain global sector such as oil or gold.
Saksena explained: “For diversification purposes, investors should look beyond US and EU markets. Investments in Emerging Market (EM) equities and bonds can complement the overall portfolio, though volatility and risk may be higher, an aspect that needs to be considered when deciding on allocation. The proportion of allocation to this segment may also vary depending on the prevailing market environment.
“Another aspect to note is that some companies listed in the US/EU are likely to have business exposure to emerging markets, thereby offering some inherent diversification of revenues. Beyond the US, EU and EM, markets such as Japan also offer interesting opportunities on a selective basis.”
“For diversification purposes, investors should look beyond US and EU markets. Investments in Emerging Market (EM) equities and bonds can complement the overall portfolio, though volatility and risk may be higher.” – Rishabh Saksena
INVESTING IN PRIVATE MARKETS AND PHYSICAL ASSETS
UNHWIs typically also tend to act as angel investors (provide capital for a business start-up, usually in exchange for convertible debt or ownership equity).
Said Guo: “Investing in assets is more lucrative. Instead of investing all your money into one equity, it is better to have a balanced investment ratio between bonds, equities, real estate, private equity funds, or become angel investors (sleeping partners).”
When people think of investment strategies, stocks, bonds or IRAs (individual retirement account) are usually what comes to mind first, primarily perhaps due to their lower entry points and higher liquidity aspects.
However, UHNWIs emphasise that real wealth is generated in private markets rather than the public or common markets, hence they rarely commit purely to investments in the public markets only.
To this end, UHNWIs tend to use private equity investments and physical assets such as real estate, artwork or precious metals, to generate high returns and add to their portfolio diversification.
Ownership of such tangible but illiquid assets means that the investments tend to be less susceptible to market swings, thus weathering market volatility better in the long term.
Added Saksena, “Though typically a smaller proportion of overall asset allocation, investment in alternatives offers an element of lower correlation to traditional asset classes. Private markets do offer interesting opportunities, but exposure needs to be managed in the context of longer investment horizons and liquidity constraints when compared to public markets.”
Information in this article does not constitute investment advice. Readers should be aware that any investment comes with risk