Bond Portfolio for High Net Worth Individuals - Different Rules?

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adam123
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Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by adam123 »

I have heard of various approaches to how much one should have in bonds - 100 or 120 minus age = bond percentage, etc. But, what about for high net worth individuals? If someone has $5m, and the market tanks by 50%, that portfolio could fall to $2.5m, and while that would certainly be cringeworthy, it is still a hefty sum.

Because a HNWI has a lot of cushion to handle a lot of risk, I would think the percentage in stocks would be dominant no matter if young or old. At the end of the extreme is the Buffet all in on the S&P approach.

1) At what net worth does the 100-age in bonds give way to a more all in in equities? Or do you think the same rule applies no matter what the underlying net worth (e.g. 50 yr old w $5m should have 2.5m in bonds)? If different rules apply, is there a different rule of thumb for HNWI - e.g. 10% in bonds, etc.? I understand there is no one rule fits all, but the same can be said about 100-age.

2) Theory aside, for any HNWI out there, what do you do actually do? For example, I know some that I have talked to (in their 70s) have mentioned the theory of a well balanced bond portfolio, but when I ask if they themselves have much in bonds, they say hell no, they will take the swings in order to reap the rewards because the nest egg can take it.
visualguy
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by visualguy »

HNWI that I know diversify into other investments, mostly real estate. Bonds aren't a major component of their portfolio.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by inbox788 »

They could use 130-age. If you want to get more exact, you need to take the weighted average of all the ages of the HNWI, spouse (if any) and all the heirs, then you could go back to 120-adjusted_age. So for a 50 year old, the rule says 70/30, but if he has 50 year old spouse and kids 18 and 22, and half the investments are earmarked for inheritance, then adjusted_age = 35, so 85/15 would still be appropriate. If only 20% was intended for the heirs, then adjusted_age = 44, so 76/24 would be the AA goal.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by jocdoc »

My plan is to have $1 million in hi quality bonds. This represents over 10 yrs in life expenses. The rest is in stocks irrespective of the % stock to bond allocation. I continue to work and am 2-5 yrs from retirement and continue to save 50% bonds and 50% stocks. The 50% bonds savings is primarily to be used to re balance into stocks if the market goes down maintaining the The $1 Mil for life expenses. I have spoken to Vanguard advisors on several occasions and they disagree with this plan. They advise a bond percentage similar to their target date retirement funds stating I don't need to take the risk.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by msk »

If you can stomach a 50% drop in portfolio I see nil need for bonds. I am 73 and 100% stocks. RE got to be too much bother so I sold off 30 rental units. I agree that the markets worldwide are very frothy but I do not want to miss a minute of this exuberant ride up. Last year I decided that I will diversify worldwide by free float market weight because the US market was even more frothy than ex-USA. Turned out great! EM went up >35% :mrgreen: Anyone who is very nervous about the stock market froth: please be informed that you can fully insure your portfolio against any drop at all by paying a 5.2% premium p.a. (price of one-year SPY Puts). I do not bother. Will ride out any major falls. Did since the early 1980s, no need to change now.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by AlohaJoe »

adam123 wrote: Tue Jan 23, 2018 1:41 am I have heard of various approaches to how much one should have in bonds [...] But, what about for high net worth individuals?
You probably aren't surprised to learn that there are various approaches for high net worth individuals as well.

Some think "I don't need to take risk" so they put it all in high quality bonds. (I've heard that Suze Orman keeps most of her wealth in municipal bonds.)

Some think "I can afford to take risk" so they invest in other things.

Still others think "I'm special and I need special investments like private equity and hedge funds".

Still others think "I'm bored and angel investing sounds like fun than fishing."

I only know a few high net worth individuals but all of them got there by being more risk-taking than the average Boglehead. So it is no surprise that their portfolios are substantially higher risk than a Boglehead portfolio. I know one high net worth person with >$20 million of Bitcoin, farmland, a "heritage home" (i.e. around $50 million, which could be considered an investment in and of itself), a venture capitalist firm, and other things -- among the couple of billion that is still in the company that he founded. Being "age in bonds" would mean he'd need something like $1.2 billion in bonds....but I don't think you'll find any high net worth person who actually would follow investment advice like that.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by InvestInPasta »

adam123 wrote: Tue Jan 23, 2018 1:41 am I have heard of various approaches to how much one should have in bonds - 100 or 120 minus age = bond percentage, etc. But, what about for high net worth individuals? If someone has $5m, and the market tanks by 50%, that portfolio could fall to $2.5m, and while that would certainly be cringeworthy, it is still a hefty sum.
Are you absolutely sure you can see a 2.5M$ loss and think: "who cares, I'm just 2.5M$ poorer than 1 year ago, I'll stay the course and rebalance"?
And let's say after 10 years you are still losing 2.5M$ because the market did not recover, but it took a 1929-1954 path (25 years) or a 1965-1982 path (17 years) or a Japan path. :twisted:

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Ethelred
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by Ethelred »

"Age in bonds" is, to be honest, out-dated advice. Most companies and experts advise keeping a portfolio with more stocks than bonds throughout retirement, even if the bond share is higher than during the accumulation phase, or at most 60% bonds / 40% stock.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by carolinaman »

I think people will see this differently. Some will apply the adage "if you have already won, why play the game?" They will invest more conservatively. Others will apply your philosophy that the portfolio can survive a bad bear market. It is just a difference in personalities and philosophy. There is no one right answer.

One example: My pension and our SS more than cover my wife and i"s living expenses in retirement (we are 73 and 75). We view our $1.3M investments as mostly inheritance for our children and grandchildren. I could justifiably, and possibly should, investment more aggressively. However, our AA is 45/55 equity/fixed. That is just who I am .
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by BolderBoy »

jocdoc wrote: Tue Jan 23, 2018 4:42 am My plan is to have $1 million in hi quality bonds. This represents over 10 yrs in life expenses. The rest is in stocks irrespective of the % stock to bond allocation. I continue to work and am 2-5 yrs from retirement and continue to save 50% bonds and 50% stocks. The 50% bonds savings is primarily to be used to re balance into stocks if the market goes down maintaining the The $1 Mil for life expenses. I have spoken to Vanguard advisors on several occasions and they disagree with this plan. They advise a bond percentage similar to their target date retirement funds stating I don't need to take the risk.
I think this is a perfectly reasonable AA to have. As well as a completely rational rebalancing plan.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by dbr »

I think need/ability/willingness applies to wealthy individuals as well as to anyone else.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by Alexa9 »

1. Use institutional class shares with the lowest ER
2. Mix of Short/Mid/Long Term, Corporate/Treasury/International/iBonds/Municipal, CD Ladder if you're risk averse
A little of everything if Total Bond Market isn't "diverse" enough for you
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by Theseus »

As a HNWI I have struggled with this myself.

I figured I should be 100% in stocks. But when I ran scenarios from different softwares (Financial Engines, WealthTrace, Fidelity etc.) a 60-40 (or 70-30) portfolio - with ANNUAL rebalancing - did better than 100-0 or 90-10 portfolios. This is before tax. But I believe that rebalancing forces you to sell appreciated asset class and invest that sum in less appreciated class.

So having said that, I have a virtual segregation of my investments. Amount I need for my annual expenses is in 60-40 portfolio. That I will continue to manage at 60-40 with rebalancing annually. The remaining money is in S&P and International stocks - much riskier. Not sure this is good or bad - but it allows me to sleep at night and this point that matters a lot more than anything else :sharebeer
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by itstoomuch »

adam wrote:2) Theory aside, for any HNWI out there, what do you do actually do? For example, I know some that I have talked to (in their 70s) have mentioned the theory of a well balanced bond portfolio, but when I ask if they themselves have much in bonds, they say hell no, they will take the swings in order to reap the rewards because the nest egg can take it.
In 2008, as I was pondering our collapsing retirement (ages 58/61) and a "possible" strong recovery, I hedged the question by buying GLWB VA annuities. What was available then and the conditions and terms 2008-2012 were different from what is available today. Since 2008, we have no bond funds or blends of stock/bond.
We may be existing GLWB VA's as they come out of the 10 year guarantee Income step-up. Undecided and looking for alternatives :annoyed .
I asked a lot of questions and those questions where I couldn't find good answers, I asked older bro :oops:

YMMV. always know, YMMV
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by GonFIRE »

I am 50/50 total US and total international. No bonds. But I have been wondering the same.

I backtested 80/20, 90/10, 100/0 for multiple time frames, including 1997-2017 and 2007-2017. 80/20 came out ahead.

Past returns do not predict the future. Aren't the past 30 years felt to be the "golden age of bonds." Does that mitigate what we should draw from backtesting?

I filled out the Vanguard asset allocation worksheet and they recommend that I.......stay 100/0! :shock:
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by dbr »

genefl wrote: Tue Jan 23, 2018 11:54 am I am 50/50 total US and total international. No bonds. But I have been wondering the same.

I backtested 80/20, 90/10, 100/0 for multiple time frames, including 1997-2017 and 2007-2017. 80/20 came out ahead.

Past returns do not predict the future. Aren't the past 30 years felt to be the "golden age of bonds." Does that mitigate what we should draw from backtesting?

I filled out the Vanguard asset allocation worksheet and they recommend that I.......stay 100/0! :shock:
My opinion that backtesting over ten and twenty year periods to make decisions about how to invest for the next 5, 10, 20, 50,100 years is completely useless. Backtesting over the last ten or twenty years wouldn't even tell you what to invest in if you started 30, 40, 50, etc., years ago.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by Wagnerjb »

adam123 wrote: Tue Jan 23, 2018 1:41 am Because a HNWI has a lot of cushion to handle a lot of risk, I would think the percentage in stocks would be dominant no matter if young or old.
Why do you say that?

For a retiree with $5 million in assets and spending $200k annually, they have no more "cushion" than the guy with $500k in assets and $20k in spending.

If a retiree has $5 million in assets and is only spending $50k annually, they may have a nice cushion.

For the first guy, the rules aren't any different.

Best wishes.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by Sandtrap »

dbr wrote: Tue Jan 23, 2018 11:14 am I think need/ability/willingness applies to wealthy individuals as well as to anyone else.
+1
Absolutely true.
I don't think there's any differentiation between the thought process and "sleep factor" for HNWI or folks in the 2 comma club or otherwise. Some with a solid pension base and large diversified income streams that more than cover floor expenses might assume more risk than a HNWI person with a very substantial portfolio but different comfort zone and financial situation.

In fact, a HNWI has more to lose than to gain so they're portfolio might be far more conservative than others might think.

j :D
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by GonFIRE »

dbr wrote: Tue Jan 23, 2018 12:10 pm
genefl wrote: Tue Jan 23, 2018 11:54 am I am 50/50 total US and total international. No bonds. But I have been wondering the same.

I backtested 80/20, 90/10, 100/0 for multiple time frames, including 1997-2017 and 2007-2017. 80/20 came out ahead.

Past returns do not predict the future. Aren't the past 30 years felt to be the "golden age of bonds." Does that mitigate what we should draw from backtesting?

I filled out the Vanguard asset allocation worksheet and they recommend that I.......stay 100/0! :shock:
My opinion that backtesting over ten and twenty year periods to make decisions about how to invest for the next 5, 10, 20, 50,100 years is completely useless. Backtesting over the last ten or twenty years wouldn't even tell you what to invest in if you started 30, 40, 50, etc., years ago.
My apologies. I am a novice trying to figure AA out. So what would be a better way to determine one's AA?
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by RAchip »

Where is the line that makes you an HNWI?

I am coming around to the view that bonds are mostly a scam at this point. MMF are getting close to 1.5% and rising. Keep some needed cash in a mmf and longer term money in an s&p 500 fund. very simple. But I am no expert.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by KyleAAA »

Same rules apply. Asset allocation should be based on need, ability, and willingness to take risk. Being wealthy impacts those 3 factors in various ways (less need to take risk but more ability, for example), but the underlying rules don't change.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by dbr »

genefl wrote: Tue Jan 23, 2018 1:40 pm
dbr wrote: Tue Jan 23, 2018 12:10 pm
genefl wrote: Tue Jan 23, 2018 11:54 am I am 50/50 total US and total international. No bonds. But I have been wondering the same.

I backtested 80/20, 90/10, 100/0 for multiple time frames, including 1997-2017 and 2007-2017. 80/20 came out ahead.

Past returns do not predict the future. Aren't the past 30 years felt to be the "golden age of bonds." Does that mitigate what we should draw from backtesting?

I filled out the Vanguard asset allocation worksheet and they recommend that I.......stay 100/0! :shock:
My opinion that backtesting over ten and twenty year periods to make decisions about how to invest for the next 5, 10, 20, 50,100 years is completely useless. Backtesting over the last ten or twenty years wouldn't even tell you what to invest in if you started 30, 40, 50, etc., years ago.
My apologies. I am a novice trying to figure AA out. So what would be a better way to determine one's AA?
One has a general notion that stocks are riskier than bonds and return more. How much more and how much riskier is difficult to estimate. The nature of the estimate is that both assets will return a dispersed range of returns. One can see what that might look like by running a program like FireCalc with the setting for not yet retired and see examples of what the outcome would have been over the last 120 years, starting in each possible year, for any given asset allocation. There is a chart printed in which one can see the range of outcomes and compare those for different asset allocations.

A different approach is to look up what is called the equity risk premium for discussion on estimating how much more stocks return than bonds. There are also plenty of estimates out there for return and risk that have attempted to derive numbers from a long period of historical experience such as here: https://www.forbes.com/sites/rickferri/ ... 366c420e73

There are lots of articles published estimating these parameters based on long term data or on economic models such as the dividend discount model for stock returns or one or another factor models for returns.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by dbr »

RAchip wrote: Tue Jan 23, 2018 2:28 pm Where is the line that makes you an HNWI?

I am coming around to the view that bonds are mostly a scam at this point. MMF are getting close to 1.5% and rising. Keep some needed cash in a mmf and longer term money in an s&p 500 fund. very simple. But I am no expert.
Calling a massively large asset class held in the trillions and trillions of dollars and other currencies by investors all over the world a scam is going a little over the top, it would seem. That you prefer to construct a portfolio from a mmf and an S&P 500 fund is fine if it suits you.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by patrick013 »

genefl wrote: Tue Jan 23, 2018 1:40 pm My apologies. I am a novice trying to figure AA out. So what would be a better way to determine one's AA?
Portfolio Allocation Models

Whether it be age-in-bonds or just a low stock allocation a high net
worth portfolio is generally an income or balanced allocation as the
individual has more money than needed and less risk is desired.

Some people like growth or a high stock allocation. Risk and reward
are desired and growth of capital is either needed or desired with a
long term investment time horizon.

Will bail outs, mortgage crises, oil crises, stall the market for 5, 10, even
20 years ? Who knows.
age in bonds, buy-and-hold, 10 year business cycle
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by dbr »

Mr. Buffett, an extraordinarily high net worth individual, apparently prefers putting most of his wealth in equities. The nation of Saudi Arabia, which is really, really high worth, does, I think, have a very large investment in oil. An Iowa farmer owning 640 acres of land is worth about $4M, assuming he owns the land outright, but either way his net worth is in land. A lot of very wealthy people own real estate. Some others have their wealth concentrated in the ownership of a single company (Microsoft, anyone, though Gates may have diversified, I suppose). Trying to generalize across all the possible examples is probably futile.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by msk »

AlohaJoe wrote: Tue Jan 23, 2018 5:07 am
adam123 wrote: Tue Jan 23, 2018 1:41 am I have heard of various approaches to how much one should have in bonds [...] But, what about for high net worth individuals?
I only know a few high net worth individuals but all of them got there by being more risk-taking than the average Boglehead.
I know a handful of self made VHNW individuals (8 to 10 figures) and they are all very willing to take risks that most BHs will consider absurdly high. Basically that's how they broke through the 8 figure wall for NW. One of these (10 figures according to Forbes) was grumbling last year that he lost several million $ on bonds. Because he used them for betting on interest trends, NOT for long term investing :annoyed
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by inbox788 »

RAchip wrote: Tue Jan 23, 2018 2:28 pmWhere is the line that makes you an HNWI?

I am coming around to the view that bonds are mostly a scam at this point. MMF are getting close to 1.5% and rising. Keep some needed cash in a mmf and longer term money in an s&p 500 fund. very simple. But I am no expert.
I don't think it's a clear line, but HNWI and FI are similar in my view. Both have cross the line where it's unlikely they'd outlive their savings. If you plug 100 years into Firecalc ( https://www.firecalc.com ), you start to see high divergence with failures and successes differing hugely. At some point, you go down a path you never recover from, either to success or failure. Those that have HNWI (assuming they live withing their means and don't overspend foolishly) and those that have achieved FI are pretty much on the success side of the line and the longer you run the simulation, the more high success points there could be.

I'm concerned about the bonds risk, but I think there is some self correction mechanism (or at least I hope there is). That's my excuse for not having international bonds, since any premium it may have is arbitraged away and only temporary, and same thought for CDs and MM, though as I'm thinking about it, I get confused. I should revisit the topic when I'm more clear headed.
Last edited by inbox788 on Wed Jan 24, 2018 1:52 am, edited 1 time in total.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by Afty »

dbr wrote: Tue Jan 23, 2018 11:14 am I think need/ability/willingness applies to wealthy individuals as well as to anyone else.
While ability to take risk is higher with HNW, need is lower. So I can see this going either way.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by yarnandthread »

Afty wrote: Wed Jan 24, 2018 1:52 am
dbr wrote: Tue Jan 23, 2018 11:14 am I think need/ability/willingness applies to wealthy individuals as well as to anyone else.
While ability to take risk is higher with HNW, need is lower. So I can see this going either way.
This is my thought as well. When you have a annual expense multiplier greater than 33 with a withdrawal rate of 3% or less a wide range of AAs appears to be sufficient based on past data. But based on this knowledge what is an INDIVIDUAL to do? The STATS suggest swing for the fences and have a high allocation to stocks, but in the end "I think need/ability/willingness applies to wealthy individuals as well as to anyone else." is spot on.

Similar to jocdoc, I have over a million in bonds, but I debate whether it is worth it to have them long term. I think I will slowly consume them for annual expenses as well as slowly convert the leftovers to stocks over the 1st 10-20 years of a very long 60 year planned retirement in a slow rising equity glide path to reduce sequence of return risk.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by dbr »

Afty wrote: Wed Jan 24, 2018 1:52 am
dbr wrote: Tue Jan 23, 2018 11:14 am I think need/ability/willingness applies to wealthy individuals as well as to anyone else.
While ability to take risk is higher with HNW, need is lower. So I can see this going either way.
In particular is the question of what the need is. I suspect really wealthy people might be interested in a lot of things besides how they are going to pay the grocery bill. People who are custodians of family fortunes have other agendas than their own retirment spending. Whether or not that leads to aggressive or conservative portfolios they have to say. Some wealthy people mainly become benefactors but I don't don't know what asset allocation that leads to. Then I knew a guy with $8M who made his wife buy a used Camry because new cars are too expensive. His assets were in real estate though so BH asset allocation doesn't apply.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by afan »

It depends on more than networth. As some have mentioned, it depends a lot on how much of it one intends or needs to spend and when.

For assets that you are absolutely certain you will never need to spend and that you view as an endowment for future generations, then the time horizon becomes that of the future generations. If you plan to give it to charity, whether it is already in a donor advised fund or on its way there or directly to a charity, then one might well be 100% stock. The goal would be maximizing expected long term return and one might not care at all about setbacks in the market.

The above would apply to money about which one would have no emotional reaction if it dropped by half because one had no plans on ever spending it.

Another way of viewing it would be an attempt to maximize risk adjusted return. Under that logic, mixing intermediate term bonds with stocks, due to their near zero correlation, produces higher risk adjusted returns- higher Sharpe ratios- than stocks alone.

Mixing international stock with US probably improves expected long term risk adjusted returns. The correlation of domestic with international stocks has become so high that the proportion in these parts of the market may not matter much anymore. Some think this high correlation will persist because the economies are so entertwined, foreign companies derive large parts of their revenue from the US. US firms derive large parts of their revenue from overseas.

If the lower correlation of US vs international stocks were to return then it would matter to have a mix of US and international.

For those truly high net worth, a lot more than single digit millions that they never plan to spend, it would make sense to diversify into direct ownership of real estate. I don't buy the claims that one should be in commodities. Some advocate venture capital or private equity but the challenge is that those are only good if you can find the right managers. The successful managers usually want more than several million as an investment and they can be extremely risky.

For what it is worth and not being ultra high networth, we have some money earmarked for our, yet to be conceived, granchildren's education or our kids retirement. We don't expect ever to have to spend it, but we are not positive enough about that to give it away now. So it is also viewed as a backup for our old age if things go so badly for so long that we need it to live on. Thus, late retirement, or grandchild education or kids retirement. That places the need decades in the future and that money is 100% in stock, US and international.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by The Wizard »

Wagnerjb wrote: Tue Jan 23, 2018 12:10 pm
adam123 wrote: Tue Jan 23, 2018 1:41 am Because a HNWI has a lot of cushion to handle a lot of risk, I would think the percentage in stocks would be dominant no matter if young or old.
Why do you say that?

For a retiree with $5 million in assets and spending $200k annually, they have no more "cushion" than the guy with $500k in assets and $20k in spending.

If a retiree has $5 million in assets and is only spending $50k annually, they may have a nice cushion.

For the first guy, the rules aren't any different.

Best wishes.
It hasn't been said explicitly in this thread, but I *think* when we say HNWI here, we're talking high with respect to annual spending as well.
So yeah, more like spending 1% or less of assets in a typical year.
One's risk tolerance can be a lot different then compared to a typical retiree hard up against the 4% swr...
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by Sandtrap »

dbr wrote: Wed Jan 24, 2018 8:26 am In particular is the question of what the need is. I suspect really wealthy people might be interested in a lot of things besides how they are going to pay the grocery bill. People who are custodians of family fortunes have other agendas than their own retirment spending. Whether or not that leads to aggressive or conservative portfolios they have to say. Some wealthy people mainly become benefactors but I don't don't know what asset allocation that leads to. Then I knew a guy with $8M who made his wife buy a used Camry because new cars are too expensive. His assets were in real estate though so BH asset allocation doesn't apply.
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Well said "dbr".
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by afan »

dbr wrote: Wed Jan 24, 2018 8:26 am I knew a guy with $8M who made his wife buy a used Camry because new cars are too expensive. His assets were in real estate though so BH asset allocation doesn't apply.
I know plenty of people in that networth range who only buy used cars. In part, that attitude towards spending is how they accumulated their money.

For many of them a used Camry would be on the expensive end of what they might consider.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by ralph124cf »

I don't think most people really consider $5M to be high net worth. Banks don't consider that to be high net worth either, although they may tell you that they do.

I consider the bottom of HNW to be around $50M.

Ralph
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by visualguy »

afan wrote: Wed Jan 24, 2018 1:37 pm
dbr wrote: Wed Jan 24, 2018 8:26 am I knew a guy with $8M who made his wife buy a used Camry because new cars are too expensive. His assets were in real estate though so BH asset allocation doesn't apply.
I know plenty of people in that networth range who only buy used cars. In part, that attitude towards spending is how they accumulated their money.

For many of them a used Camry would be on the expensive end of what they might consider.
Many small-to-medium real estate investors put every penny they have in leveraged real estate. Nothing left to buy a nice car... It's a cultural thing for those types of investors, and it's strange because they keep on doing that long after it's necessary. It always astonishes me - they can have many millions or tens of millions in real estate, but almost nothing liquid.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by jainn »

. . . .
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by Abe »

ralph124cf wrote: Wed Jan 24, 2018 9:38 pm I don't think most people really consider $5M to be high net worth. Banks don't consider that to be high net worth either, although they may tell you that they do.

I consider the bottom of HNW to be around $50M.

Ralph
Dang...I was beginning to think I was rich. :happy
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by galeno »

To be in the top 1% of the USA you need a net worth of $9M (wealth) and a before tax annual salary of $500K (income).

With $50M one is easily in the top 0.1%.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by afan »

ralph124cf wrote: Wed Jan 24, 2018 9:38 pm I don't think most people really consider $5M to be high net worth. Banks don't consider that to be high net worth either, although they may tell you that they do.

I consider the bottom of HNW to be around $50M.

Ralph
Somewhere between $50M and $100M. Enough to afford a family office. Enough to get into the popular private equity and venture capital funds. Enough for offshore accounts. Not that any of these are necessarily good ideas, but at those asset levels they become available. Enough for diversified direct ownership of real estate. Enough multigenerational estate planning.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by afan »

visualguy wrote: Wed Jan 24, 2018 9:52 pm

Many small-to-medium real estate investors put every penny they have in leveraged real estate. Nothing left to buy a nice car... It's a cultural thing for those types of investors, and it's strange because they keep on doing that long after it's necessary. It always astonishes me - they can have many millions or tens of millions in real estate, but almost nothing liquid.
Or they keep their assets in the business they built that made them the money. Or they just got in the habit of investing their money rather than spending it and care more about seeing it grow than driving a fancy car.

It sounds strange to people who care about cars, but many people don't. Just not interested. Their car works, so they are happy. If it does not work they either repair or replace it, with as little cost and hassle as possible. Shopping for a car is not something they have any interest in or intention of doing. New cars are a waste of money, so why buy one?

For some reason, I seem to know a lot of people who buy used Subaru cars. When one gets too old to be worth fixing they buy a new, used, Outback. Since they don't shop for alternatives, they don't know, and don't care if Car and Driver called something else the car of the year.

They don't care about 0-60 times, cornering speed or fancy extras. Just want a car. Reliable. Does well in the snow. Decent gas mileage. Pretty safe. Not too expensive. Those are easy to come by. No need to spend a lot of capital that could be invested.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by Blueskies123 »

msk wrote: Tue Jan 23, 2018 5:00 am If you can stomach a 50% drop in portfolio I see nil need for bonds. I am 73 and 100% stocks. RE got to be too much bother so I sold off 30 rental units. I agree that the markets worldwide are very frothy but I do not want to miss a minute of this exuberant ride up. Last year I decided that I will diversify worldwide by free float market weight because the US market was even more frothy than ex-USA. Turned out great! EM went up >35% :mrgreen: Anyone who is very nervous about the stock market froth: please be informed that you can fully insure your portfolio against any drop at all by paying a 5.2% premium p.a. (price of one-year SPY Puts). I do not bother. Will ride out any major falls. Did since the early 1980s, no need to change now.
I have posted this before but for anyone saying they they can brush off a 50% drop you need to say that you have read this thread from beginning to end.
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by afan »

That Tiger21 group is fascinating.

What in the world would induce someone, at any asset level, to join?

Forget about the absurd membership costs. Why would someone want to meet these people? The hedge fund managers (why anyone would want to talk to them I don't know) are on CNBC and Bloomberg for free. If I wanted to go to an art exhibit I would just go. I don't need to join a club to do that.

Sounds like a great way to attract salespeople of every stripe looking to market something. Do you think all the members are there trying to sell to each other?
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by Atgard »

I've been struggling with percentage-based allocations as well across various levels of wealth.

For example, it's fine to say someone should be 60/40 stocks/bonds. But someone with $10,000 net worth needs to have 100% of that in a liquid emergency fund (probably savings accounts, not even bonds). For someone with $100,000 to $1,000,000 the 60/40 might make sense. But someone with $10M? $100M? It starts to get fuzzy. Does anyone need $40M in bonds if the most they can expect to reasonably spend in their lifetime is, say $10M? On the other hand, that person has already "won the game" so he can do almost anything he wants in terms of AA and will be just fine, so is there any one "right" answer?

So I think the AA advice at different wealth orders of magnitude is quite different. I don't know if the same percentage-based AA really works so well for both someone with $100K and someone with $100M. And maybe someone making his first Roth contribution at age 23 can just stick it all into stocks and forget AA since his time horizon is so long.

(As a side note, I've even struggled with this myself as my own net worth has grown modestly, though nowhere near $10M+. Do the same percentages make sense at $100K and $500K and $1M? And it was a challenge helping a friend at an earlier stage of saving/investing since the picture was so different from my own; for example, most net worth tied up in the house, most investable assets in 401k and almost nothing left in taxable, more job stability, etc.)
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by Afty »

ralph124cf wrote: Wed Jan 24, 2018 9:38 pm I don't think most people really consider $5M to be high net worth. Banks don't consider that to be high net worth either, although they may tell you that they do.

I consider the bottom of HNW to be around $50M.
This seems to be another example of the "Bogleheads bubble."

Wikipedia defines a "high-net-worth individual" as someone with $1M of investible assets, excluding primary residence. Investopedia says, "The most commonly quoted figure for membership in the high net worth club is $1 million in liquid financial assets."
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by KyleAAA »

ralph124cf wrote: Wed Jan 24, 2018 9:38 pm I don't think most people really consider $5M to be high net worth. Banks don't consider that to be high net worth either, although they may tell you that they do.

I consider the bottom of HNW to be around $50M.

Ralph
$5M is definitely high net worth. It isn't ULTRA high net worth in the sense that one doesn't need to worry about money, but it's closing in on the top 1% of the net worth distribution. If top 3% isn't high, what is?
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by KlangFool »

adam123 wrote: Tue Jan 23, 2018 1:41 am I have heard of various approaches to how much one should have in bonds - 100 or 120 minus age = bond percentage, etc. But, what about for high net worth individuals? If someone has $5m, and the market tanks by 50%, that portfolio could fall to $2.5m, and while that would certainly be cringeworthy, it is still a hefty sum.
adam123,

<<If someone has $5m, and the market tanks by 50%, that portfolio could fall to $2.5m,>>

The number (Net Worth) is meaningless without knowing the person's annual expense.

A) If that person's annual expense is 200K, the person is in serious trouble.

B) If that person's annual expense is 50K, there is no problem here.

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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by KlangFool »

Atgard wrote: Fri Jan 26, 2018 10:12 am I've been struggling with percentage-based allocations as well across various levels of wealth.

For example, it's fine to say someone should be 60/40 stocks/bonds. But someone with $10,000 net worth needs to have 100% of that in a liquid emergency fund (probably savings accounts, not even bonds). For someone with $100,000 to $1,000,000 the 60/40 might make sense. But someone with $10M? $100M? It starts to get fuzzy. Does anyone need $40M in bonds if the most they can expect to reasonably spend in their lifetime is, say $10M? On the other hand, that person has already "won the game" so he can do almost anything he wants in terms of AA and will be just fine, so is there any one "right" answer?

So I think the AA advice at different wealth orders of magnitude is quite different. I don't know if the same percentage-based AA really works so well for both someone with $100K and someone with $100M. And maybe someone making his first Roth contribution at age 23 can just stick it all into stocks and forget AA since his time horizon is so long.

(As a side note, I've even struggled with this myself as my own net worth has grown modestly, though nowhere near $10M+. Do the same percentages make sense at $100K and $500K and $1M? And it was a challenge helping a friend at an earlier stage of saving/investing since the picture was so different from my own; for example, most net worth tied up in the house, most investable assets in 401k and almost nothing left in taxable, more job stability, etc.)
Atgard,

The answer is simple and straightforward if you choose to think and allocate in term of your annual expense. If you prefer to keep 10 years of your annual expense in fixed income, pick an AA that meets the numbers as per your portfolio size.

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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by Atgard »

Thanks, Klang, I guess I do somewhat think about it that way (certainly in terms of emergency fund and safety net for if my job/business goes poof). It's just I almost never see it talked about on here as "X years of expenses in bonds, rest in stocks," almost always as percentages, i.e. 60/40.

What amount of months/years of living expenses do you guys consider reasonable to hold in bonds (or other fixed income)? 1 year? 5 years? 10 years? More?

And I would imagine it relates to age and predictability of current income (perhaps more if your job is unstable, and less if it's a gov't job you have no fear of losing)?
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Re: Bond Portfolio for High Net Worth Individuals - Different Rules?

Post by KlangFool »

Atgard wrote: Fri Jan 26, 2018 4:58 pm Thanks, Klang, I guess I do somewhat think about it that way (certainly in terms of emergency fund and safety net for if my job/business goes poof). It's just I almost never see it talked about on here as "X years of expenses in bonds, rest in stocks," almost always as percentages, i.e. 60/40.

What amount of months/years of living expenses do you guys consider reasonable to hold in bonds (or other fixed income)? 1 year? 5 years? 10 years? More?

And I would imagine it relates to age and predictability of current income (perhaps more if your job is unstable, and less if it's a gov't job you have no fear of losing)?
Atgard,

And, how close you are to your retirement/FI goal? Your AA should not be 100/0 if it is 25 times your current annual expense. My AA is 61/39 since my portfolio is about 20 times my current annual expense.

KlangFool
Last edited by KlangFool on Fri Jan 26, 2018 7:56 pm, edited 1 time in total.
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