As an investor looking for opportunities in the face of uncertainty, having a clearly-defined and documented investment strategy can help you work toward your financial goals.
After all, investing alone is not what leads to desired outcomes. The strategy behind your investments puts you in the best position to reach your goals over the long term.
Here is what investors should know when it comes to establishing a prudent investment strategy, especially in the face of economic uncertainties such as stagflation and a probable recession.
Key Components of an Investment Strategy
An investment strategy is what guides investment decisions and includes an investor’s capital needs, personal goals, time horizon, and tolerance for risk.
Your investment time horizon (timeframe during which you need the investments to support you), whether it be in retirement or another life stage or event, significantly impact your investment strategy as time is a chief determining factor of risk capacity and overall strategy.
In the case of investors who have more than enough capital, the emphasis on personal goals and values becomes much more prevalent in an investment strategy. The why behind your investments and what you ultimately hope to accomplish with your money (versus growth of money) takes center stage.
Areas of Focus for Ultra High Net Worth Investors
Here are the five areas of greatest importance to high-net-worth investors when it comes to developing an investment strategy.
Investors with substantial capital tend to diversify assets across several different asset classes. Money is often invested in both liquid and illiquid vehicles that serve varying objectives. Yes, investing in traditional stocks and bonds is likely, but an investment strategy may also include business interests, real estate, art, and potentially other alternative investments that are exclusive to a certain level of investor.
Diversification is what helps you to keep your risk managed within the levels you are personally comfortable and can accomplish any number of objectives from growth, protection, income, and tax minimization.
Speaking of taxes, an effective investment strategy includes tax efficiency. Exercising ways to minimize tax liabilities either now or in the future is part of a strategy that preserves as much income as possible for the investor or his/her beneficiaries.
Given the complexity of personal finance, incorporating a clearly-defined tax strategy along with your investment strategy can help offset any overpayment in taxes that can occur if you are not actively looking for ways to reduce your taxes.
We may not be able to look into the future and know exactly how much higher tax rates will be, but taxes tend to go up, not down. With that in mind, it only makes sense to seek ways to lower taxes as much as possible in the short and long term.
Generational Wealth Transfers
Planning wealth for future generations comes in many shapes and sizes. Not every investor wants to leave their heirs everything. Perhaps you want to establish rules and boundaries around when and if beneficiaries gain access to funds and structuring investments to account for this is important.
Preparing future generations to be good stewards of wealth or when and how they take over the family wealth is a deeply personal decision that takes careful planning and consideration.
History tells us that within three generations, the wealth the first generation amassed is gone. Future generations tend to squander family wealth because they were not prepared to inherit it, nor did they understand the purpose and the value of the wealth, to begin with. For this reason, legacy planning is paramount to successful transfers of wealth from one generation to the next.
Money is just money until it has a purpose.
Since many high-net-worth individuals have ownership of a business or business interests, it is only natural that their investment strategy includes a business component to address them.
Whether selling or buying or planning for succession down the road, personal investments and business interests oftentimes share a symbiotic relationship. Therefore, a prudent investment strategy takes this into account and carefully assesses how financial decisions in one area of life impact the other.
Succession planning isn’t just the passing of business assets to beneficiaries. Succession planning is how your business will be taken over by heirs. How and when your business succession takes place is highly relevant to your overall financial well-being and legacy. For this reason, it is a highly important area of investment strategy.
Risk Management and Protection
Protecting one’s money becomes just as important as growing it. Many affluent are the first generation and did not grow up with ample means. Because of humble beginnings, there is a healthy fear that everything can vanish if you are not careful.
Aligning your risk with your goals, and taking the adequate amount of risk to reach your goals, no more and no less, becomes even more important. If you don’t want your net worth to go down, ensure you are not taking on more risk than necessary to stabilize your portfolio and meet your goals.
Often, when more than adequate means, you are flooded with opportunities (i.e., investment opportunities, business partnerships, etc.). Being clear about what you are trying to accomplish and how you are going to invest your assets to accomplish this will prevent you from taking on too much risk, having too many investment interests to keep track of, and having a fragmented portfolio of assets that does not meet your goals.
Whether it’s your personal wealth or your business interests, there is no reason to overleverage yourself or your financial interests. For people comfortable with taking risks, it can seem only natural to assume more risk than is necessary to increase profits. And yet certain risks simply are not necessary or advisable at a point.
When you have more than enough, protecting your money must take priority over the potential to grow it even more.
Investment Policy Statement
To ensure that you have a clear and prudent investment strategy to meet your goals, a documented investment policy statement is a good place to start. This statement is the guiding principle, your North Star, for why you invest and for what purpose.
By creating an investment policy statement, you can know how much money you need to reach your goals, your willingness to take on a certain level of risk, and your ability to stay within appropriate levels of risk for the goals you want to accomplish.
At the end of the day, you don’t need to create an investment management strategy on your own. Talk with your financial advisor and investment manager to walk you through your individual situation and help you work toward an investment strategy that’s right for you.