If you are a high-income earner and are looking for ways to maximise your money, the following article will outline some useful ways to help set yourself up for financial success.
How do high-net-worth individuals invest?
There are many different approaches that investors can take, and the average Australian investor often looks to three asset classes; cash, properties, and shares. However, it has been suggested that high-net-worth-investors (HNWIs) don’t only follow this trend. Although these asset classes remain viable options for many investors and have stood the test of time, particularly throughout global pandemics, market volatility and record low-interest rates, HNWIs also focus on other key strategies to grow and maintain their wealth.
Wealth growth vs preservation
Growing and preserving wealth are two different things and HNWIs understand and implement the appropriate strategies contingent on the stage they are at on their financial journey. Wealth growth refers to generating returns on investments and increasing the value of your wealth through capital appreciation. This could include taking on new risks to continue generating and increasing your wealth over time. Conversely, wealth preservation is a strategy that ensures your assets continue to grow and are maintained while providing a legacy for those who come after you. It is vital that investors understand where they are at on their financial journey and adapt their goals and objectives as they near retirement, and it is also important to have a balance between these two goals.
It is likely that younger investors will be more focused on accumulating wealth as they have the time to invest in riskier growth assets and are receiving income to support this. Those investors who are nearing retirement do not have the same luxuries and cannot afford to make irrational decisions and mistakes that could cost them in retirement. Therefore, as you progress throughout your financial journey, it is a good idea to shift from being growth-oriented to preservation-oriented.
A global outlook
HNWIs are also more likely to look overseas than to invest in domestic assets which are more prevalent amongst average retail investors. This approach can provide investors with increased access to more opportunities for growth and therefore greater returns. Taking a global outlook also helps investors understand how global markets often influence domestic markets and may help them to respond more efficiently to changes in the global economy such as the COVID-19 pandemic which began in China. Research from Citi Wealth Management suggests that clients reduced their exposure to domestic investments by 24%, going from a 69% to a 45% allocation over a six-month period.
For some perspective, the domestic bond market in Australia is worth around $1.6 trillion in comparison to $130 trillion for the global bond market. Similarly, US equities market cap is around $39 trillion, compared to Australian equities which is around $1.3 trillion. Therefore, those in the growth stage of their financial journeys may wish to take a global approach to maximise their returns and reach their financial goals. The caveat for investors to be aware of is that this may be accompanied by additional risk and it is critical that each individual invests following a risk profile that truly reflects their risk tolerance and ability to cope with market volatility.
Although HNWIs still have exposure to property, shares, and cash, they have been found to maintain more diverse portfolios. A report published in 2019 suggested that there has been increasing demand amongst this group of investors for alternative assets outside of domestic stocks such as infrastructure, private equity funds and unlisted management funds. Fixed-income assets have also been a popular choice amongst these investors as they provide them with a stable source of income that is not impacted by market conditions or volatility. Citi has reported a 26% increase in bond assets under management as well as a 15% rise in invested bond volumes which highlights the movement towards this asset class. Bonds and fixed interest may also be a viable option for those nearing or in retirement who wish to preserve their wealth and reduce their exposure to market highs and lows whilst continuing to receive income.
Those investors who have grown their wealth also need to protect it for the years to come. This differs from the growth stage as instead of chasing risks, investors are likely to take a more defensive approach. An important part of this is estate planning and ensuring the appropriate legal structures are in place to protect your assets. At a minimum, investors may wish to complete and finalise a Will, which will help to ensure that their assets are distributed according to their wishes. For those individuals with more complex affairs, you may wish to investigate whether a testamentary trust could be appropriate for you.
Engaging with a financial adviser is also a viable way to ensure you can grow your wealth now as well as preserve it down the track. Please click here to organise a complimentary 20-minute consultation with an EPG Wealth adviser to get your financial journey started today.