High Net Worth - Is Your Asset Allocation Acceptable?

Route246

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I know there are some high net worth folks out there who are very highly allocated in equities, many like me acquired compounded gains through equities positions over long periods of time. I have a friend who is worth over 100M and has about 20M in fixed income treasuries and munis. The munis are fine but his AGI including dividends is over 4M and he feels the pain with his tax bill. Nice problem to have but he is about 82:18 equities:fixed. I'm not near his position but I just exchanged all of my blended funds in IRA to Vanguard 500 so I am now about 95:5 concentrated and exposed in equities (mostly SP500-type funds). I'm OK because that 5% should be enough cash to fund 5 years cash outlays. Spoke with the wife about it and she is OK with a severe correction in the market and her feeling is easy-come-easy-go.

Do you feel uncomfortably high in equities but tax consequences are preventing you from rebalancing?

Do you have any uncomfortable positions in individual stocks acquired from employment RSU, ESPP, options, etc?
 
Playing the game aggressively when it's already been won is a common discussion over on bogleheads. If I had 100x annual expenses, I would not be 95% equities.

Regarding taxes - don't let the tail wag the dog. Somebody who is making $4M per year from passive income should be focusing on the >$2M in "free" income, not the taxes paid.

That's about 30 years of household income for the average American.
 
A lot of my assets are in IRAs so there are no tax consequences in those accounts if I rebalance. Right now I'm about 65% equities at age 71 and I'm OK with that. One part of my spreadsheets shows what I'd have now from my retirement nest egg after withdrawals if I'd stuffed it in the proverbial mattress. I'd have about 44% of what I actually have.

I'll suffer the tax consequences.
 
I don't have stock/equities positions that I'm uncomfortable with. But I have tumbled to the concept of keeping only about 10 years of spending in fixed income. More than that in fixed income is basically dead money. If you are HNW with reasonable spending, that might only be 20% or 10% of your portfolio. I'm not there, but am feeling more comfortable with a rising glidepath (age in equities) to 70% equities when I claim SS.
 
We were highly leveraged in equities for a long time.
Not so much now.

One thing that I try to do is seperate good investment decisions from tax based decisions. Sometimes they are in tandem. Other times not so much. Over the years I have learned the hard way to place solid, common sense equity decisions before tax considerations.

We are not afraid of paying taxes. It is part of the deal. We do our best to avoid taxes.
 
After doing it ourselves for approximately 30-years we hired professional asset management. We felt that our net worth had grown to a point where we needed professional guidance and management. Yes, we pay fees but the income deribed from our portfolio far outweighs the fees.

As of today our AA is:

- Domestic Bonds and bond funds: 42%
- Large CAP mutual fumds and ETFs: 29%
- Small CAP mutual funds amd ETFs: 14%
- International: 2.11%
- Other: 3.8%
- Cash: 10%

Our portfolio is professionally managed with these principles:

- Simplify & Consolidate: We had a number of taxable and retirement accounts spread all over creation.

- Preservation of assets: Our risk tolerance is *significantly* lower than during our acquisition phase. We want to keep what we've amassed.

- KISS: No complicated investments...PUTs, CALLs, hedge funds, etc.

Our portfolio consists of muni bonds (AAA rated), domestic bonds/bond funds, treasuries, equity mutual funds and ETFs, No individual stocks and no direct investments in countries which are hostile towards the US.
 
I'm OK because that 5% should be enough cash to fund 5 years cash outlays. Spoke with the wife about it and she is OK with a severe correction in the market and her feeling is easy-come-easy-go.
It is great that you and your wife are both in. That is the most important thing.
When you have a large enough NW, you have the extra freedom to have any AA you want and still be OK at the end (folks with <2% WDR). Personally, I am still working to fine tune my own AA. The feeling is definitely different when the market is up vs when it is down. The "right" AA will allow one to ignore the market noise
 
Playing the game aggressively when it's already been won is a common discussion over on bogleheads. If I had 100x annual expenses, I would not be 95% equities.

Regarding taxes - don't let the tail wag the dog. Somebody who is making $4M per year from passive income should be focusing on the >$2M in "free" income, not the taxes paid.

That's about 30 years of household income for the average American.
Some may have other reasons for staying aggressive. Perhaps they want to build generational wealth, or leave behind a very large charitable legacy.

Totally agree with the tax comment. Why on earth would they let that nag at them?
 
I'm about 80% equity mis 60's I don't plan to change that status. Taxes are going to be large for me but I don't worry about that they don't get it all. I'm not going to try to save every penny working the system which is legal to pay less tax. You pay now or later and not so sure it isn't a wash when and how you pay them.
 
I don't think I qualify for HNW status, but I also don't know what the HNW cutoff is (and don't really care).

I'm 99/1 and am perfectly comfortable with the AA at age 55 retired 8 years now. It helps greatly that my net WR% is about 1%.

I consider tax consequences and try to minimize them, but keeping my AA where I want it is more important. Like another poster, I rebalance inside my traditional IRA so no tax consequences to rebalancing for me.

As far as employer stock, I did keep track of that while working and set myself an upper limit on those things. My personal limit was 4% of net worth, which was on the conservative side as a limit but I don't remember ever hitting it so it never really came into play for me. I think that's because by the time I started getting significant equity compensation I was at the later end of my career, and my net worth from aggressive saving along the way had already taken off.
 
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Playing the game aggressively when it's already been won is a common discussion over on bogleheads. If I had 100x annual expenses, I would not be 95% equities.

Regarding taxes - don't let the tail wag the dog. Somebody who is making $4M per year from passive income should be focusing on the >$2M in "free" income, not the taxes paid.

That's about 30 years of household income for the average American.
Thank you. I will have to spend a little more time over there to hear more opinions. You said you would "not" be 95% equities? Or, did you mean "now" in this context?
 
I'm about 70-30 equities-fixed income, and about 95% in IRAs At 68 I'm find with this till the end. I view the time frame for the investments as my heirs time frame not mine. We only take about $12K each year from IRAs and next year will start SS and I don't expect any regular draw from them after that. YMMV
 
I don't know the cut off for HNW, but we are about 60- 40 equities to fixed income in terms of market assets. Real estate and life insurance are about 12% and 14% respectively of total assets.
I feel very comfortable where we are right now.
 
I keep our portfolio in an AA appropriate to my kids ages. But they are getting older so I may need to consult with them. :)
 
Had been 70/30 even at age 72. But since there's easy money at 5%, 6% and 7% in MMs and other vehicles with much less risk, I'm (temporarily? ) at about 55/45. Once the rates cool off, I'll likely go back to 70/30.
 
Don't let the (tax) tail wag the dog (income). My DF is not Ultra, but he is in top 4% and he understands your friends problem. We literally just had the discussion of reducing his 95% exposure to stocks to reduce his tax bill...I said, why? Paying more tax than you need to is one thing, but deciding to forego investment opportunity just because you want to pay Uncle Sam less seems silly.

This problem does get compounded with gains, but you never hear that same rich person complaining when markets are down and they are taking full advantage of the tax code.

*Usually within the same breath of complaint's air, DF comes to his senses and 9/10 times comes to the realization he would rather have a tax problem then an income problem.
 
I don't know the cut off for HNW, but we are about 60- 40 equities to fixed income in terms of market assets. Real estate and life insurance are about 12% and 14% respectively of total assets.
I feel very comfortable where we are right now.
I believe it would be the top 1% reported income/earners. Top 10% would be High Net Worth?
 
I was curious, so I googled it. Seems a popular definition of "HNW" individual is someone who has between $1M-5M in investible assets. I found one page that defined the bracket of $100K-$1M as "Sub-HNW"
Oh wow, in that case I guess even I am in that category. I don't know why but for some reason I feel imposter syndrome, like maybe others have much more than I do and I don't belong at that level of entry. Maybe that's the engrained saver mentality I have, though.

So since I fit the category, I am a little different since I am still very much in the game at 42. If I had "won the game" and mortality was closer, I might see some reason to reduce equity exposure. But honestly with DF at UHNW and us in HNW category, I don't see any downside risk to continuing at 100% equities.

The only use case would be if we needed a very LARGE sum of cash, it would be nice to not have to sell. But even then, I can just unload the contributions and would largely avoid triggering a tax event.

We even discussed Dividends a bit. Qualified, and Ordinary. Those really start to add up in the broker account with UHNW, and even HNW a bit...and can impact the tax planning more than one thinks.

DF and I are still ~100% equities as we can be most days, and right now exposed to MAG 7 and Large Cap US through ETFs and some individual holdings.
 
AA is simply a matter of preference/comfort level at that point.
This is key. If your AA is "not acceptable" to you (using the OP's phrase) then you're likely to take action at some point that has negative impact on your finances. Like panic selling in a downturn. Or buying something too risky or too conservative for your personal risk tolerance. 2007-08 taught me to stick with our AA. (we did and it was hard at times). I think that knowing yourself - and your own personal risk tolerance & risk capacity are what determines "acceptability" and should (ideally) guide your AA. So no OP - tax consequences don't keep us from our AA. RSUs, options, ESPP $ were redeployed as often as feasible to match our AA. So far it's working out.
 
Thank you. I will have to spend a little more time over there to hear more opinions. You said you would "not" be 95% equities? Or, did you mean "now" in this context?
No, I meant "not", as I typed. I also wouldn't be ultra-conservative.

We are currently 65/35 and since we aren't interesting in leaving a giant pile of cash behind, don't see a reason to be more aggressive.
 
We’re about 75%/30% for equities/fixed investments not counting real estate. Our stocks/ETFs provide dividend income growth that combined with fixed income, social security and a small pension provide a nice income that beats inflation.
 
Hard to believe that any HNWI's would be hanging here. (If HNWI is 100m as mentioned by the OP) I always thought HNWI started around ~30m so that seems possible for a few here. I know if I had 30m+ I'd be spending my time somewhere else.
 
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