What's Keeping You Up At Night?

I can certainly tell you one thing that keeps me up at night and that is the age old question: Am I doing the right thing for my clients? Because, if I am, then, generally, the world order (or at least that which I can control) is in good standing (pandemics, politics, economics and idiots / cov-idiots aside).

Every year a company called Capgemini Research Institute puts out a something called the World Wealth Report, which is basically a survey of the world's High Net Worth (HNW) folks and what it is that is most pressing to them and how Wealth Managers are responding to meet their needs.

Here is how they define High Net Worth (and what kind of returns those folks have been able to achieve. CAGR = Compound Annual Growth Rate):

Clearly, 2020 has (and they do address this in the report) added some interesting new dimensions to returns.

Interestingly, here is how they allocate their assets:

I am always intrigued by the "cash and cash equivalents" allocation because it is a constant conversation point with clients. For some it indicates to them that they are not fully invested. Fully invested can be strategic, but as we do remind our clients, if your total portfolio is growing at a CAGR of 6% (or any growth number for that matter), so is the cash  and cash equivalent component as a function of the total portfolio. Each allocation to a specific asset class adds to the strategic aspects of portfolio balance: fixed income provides cash flow (and at times some capital growth) which can be drawn on (for lifestyle needs) or re-invested; equity assets provide capital growth (and some dividend income) and cash and cash equivalents provide protection (defensively) because they add stability (especially in times of high volatility) and cash flow availability when other asset prices may be at points where selling them is not strategic or tactical.

Together, all these components and individual holdings work in conjunction (diversification and balance) to provide a strategic allocation and perhaps, at times offset (hedge) to create balance and risk control. Good portfolio managers understand how all these pieces fit into the portfolio puzzle and that is how risk is managed. Trying to analyze (and debate the efficiency) of each component transaction separately in a portfolio is destined to be a conversation in futility as re-balancing, i.e. buying and selling of various assets (an absolutely paramount part of portfolio management), becomes strategic and tactical too.

Another interesting aspect of the breakdown of High Net Worth assets is the diversification aspect. Notice that risk is mitigated by equity ownership being limited to approximately 30% (or slightly more or less). To me this indicates that there is less of a tendency to "gamble" by parking too much net worth in any higher risk situation. 

If we can make the assumption that most HNW folks do not need to gamble, then perhaps we can also assume that they are stewarding their wealth rather than trying to "get rich quick".

When I hear about and see the resurgence of "day-trading" it does make me pause and consider that it is likely not something that the HNW crowd is into. HNW folks strike me as those who might take a pass on a fad.

So if what keeps you up at night is wondering whether you are doing the right thing to build or preserve your wealth (meet your long term financial goals and objectives), perhaps take some lead from the HNW crowd, as they have obviously had some success in doing so.