How the ultra-rich choose their investments

Constructing a well-diversified investment portfolio requires a deep understanding of the relationships between different assets. And it’s not just about mitigating risks; it's also about optimising for potential returns. By adding assets with low correlations, you not only cushion your investments from declines across the board, you also position yourself to capitalise on a broader range of opportunities.

The historically negative correlation between public equities and bonds is one reason the “60/40” portfolio has been a mainstay for investors.

However, this low correlation relationship was disrupted in 2022, when the Federal Reserve began raising interest rates to the highest level in 50 years, in an effort to combat inflation. Bonds and equities declined in tandem and failed to act as a counterweight to each other, resulting in the “60/40” portfolio having one of its worst years on record.

This is one reason for diversification. If your entire investment portfolio consisted solely of bonds and public equities in 2022, it undoubtedly suffered from the tandem decline. Fortunately, the S&P 500 has rebounded by around 30% from the end of 2022 to date (Mid-Feb 2024), and real yields are at their highest in decades.

But stocks and bonds aren’t the only two asset classes that belong in a well-diversified portfolio. There are other asset classes that have a low correlation to stocks and bonds.

That’s one reason why ultra-high-net-worth (UHNW) and institutional investors include these in their portfolios, even allocating substantially to some of them.

Here’s how the ultra-rich diversify their portfolios – the below is a chart of asset allocations from TIGER 21, a global community of ultra-high-net-worth entrepreneurs, investors, and executives.

Source: TIGER 21, full report here.

And here’s a little insight into why the ultra-rich choose to invest in these assets as part of their overall investment portfolios:

• Private Equity: Investing directly in private companies, like start-ups, or through private equity funds can offer returns that are not tied to the broader stock market. Private companies are not subject to the market sentiment swings that public companies face. Valuations here are managed over a longer time period and based more on fundamental analysis, avoiding the volatility of market sentiments.

• Real Estate: Direct real estate investments, like properties, and indirect investments like Real Estate Investment Trusts (REITs), provide cash flow and value appreciation distinct from traditional markets.

• Hedge Funds: These utilise various strategies for positive returns regardless of market direction, often striving to be market-neutral. This means their returns are likely to be uncorrelated with broader market returns.

• Commodities: Gold, oil, and agricultural products are independent from stocks and bonds. For example, gold can be a safe-haven asset for an investment portfolio, seen as a hedge against inflation and currency fluctuations.

• Cash and Cash Equivalents: Low-risk investments like Treasury bills and money market funds offer capital preservation during volatile market conditions, when riskier assets may be performing poorly.

📊 Diversification is key to growing your wealth

While a UHNW portfolio can teach you a lot, your portfolio should reflect your time horizon, risk tolerance and appetite, need for liquidity and income. But diversifying beyond just equities and bonds is a crucial principle for all investors.

As the financial landscape evolves and new asset classes emerge, the importance of low correlation becomes even more pronounced. Remember, the goal isn't to predict the markets perfectly (because that’s impossible!), but to build a resilient portfolio that can navigate the uncertainty of the financial world. And why not take some lessons from the ultra-rich too?