One of the most effective ways to learn how to do something is to pay attention to those who do it well. If your goal is to build wealth, it makes sense to pay attention to those who have already built it.
By following what high net-worth (HNW) individuals are investing in, what they're thinking about the market, and what financial strategies they're pursuing, you can gain insight about investment issues and ideas that might not be on your own radar screen.
One useful tool for tracking the investment behaviour of HNW individuals is the most recent quarterly member survey from TIGER 21, an exclusive North American peer-to-peer network for investors with a minimum net worth of $10-million.
The survey takes the form of a detailed, confidential questionnaire that asks members where they currently have their portfolio allocated.
The organization has about 360 members in Canada and the United States. Nearly all participants are highly successful investors, and most are entrepreneurs with a very good eye for opportunity – and perhaps more importantly, a good eye for potential danger, too.
As you can see in the accompanying chart, real estate comprises the largest portion of the typical portfolio, at 28 per cent (far right bar, as of Sept. 30, 2015). Public and private equities are also well represented. These allocations are particularly intriguing when you consider how they've changed over time.
The data help to confirm several insights I've gleaned from many recent conversations with HNW individuals.
Defensive move into fixed income
The first thing that jumps out to me is the increase in the fixed income allocation – from 9 per cent of the portfolio to 11 per cent, a jump of just over 20 per cent. That's still a relatively modest allocation, but the first time in over two years that it's actually increased. The increase seems even more significant to me given the current ultra-low interest rate environment: The fact that HNW individuals are willing to accept very little yield tells me the purpose of the increase is defensive. In the face of an increasingly volatile equity market, HNW investors have put aside their concern about rising interest rates and have begun to add to existing fixed income positions.
Back in to private equity
Over the previous three quarters, allocations to private equity have been on the lower end of the historical range. That changed over the most recent quarter: Private equity now sits at 20 per cent of the typical TIGER 21 member portfolio. Again, I'd characterize this shift as a defensive one. HNW investors understand that private equity (operating businesses, venture capital and managed funds that invest in these assets) offer attractive performance that's minimally correlated to public equity markets. In times of volatility, that's exactly what they're looking for.
Digging into (and out of) real estate
One of the allocations I've kept my eye on over the past several quarters is the real estate allocation. As mentioned, it currently stands at 28 per cent of the overall portfolio, down 2 per cent from the quarter before. This is the first time real estate has slipped over this last year; this, too, coincides with conversations I've had recently. Many HNW individuals continue to take profits in real estate (an asset that has served them well since the 2009 bottom) and shift into defensive mode.
I should note that because a large portion of TIGER 21 members have created their wealth via real estate holdings, any new members tend to "skew" the allocation number higher. I suspect this number would have been substantially lower were it not for a significant number of new members joining the group over the past year.
Final thoughts: Concentration of wealth tends to create wealth, but diversification tends to help keep it. Wealth investors tend to focus on preservation before growth.
Thane Stenner is founder of StennerZohny Investment Partners+ within Richardson GMP Ltd., as well as director, Wealth Management. Thane is also chairman emeritus of TIGER 21 Canada. He is the bestselling author of True Wealth: an expert guide for high-net-worth individuals (and their advisors). (mailto:thane.stenner@richardsongmp.com). The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates.