Investment strategies for high net worth individuals

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abhi764
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Investment strategies for high net worth individuals

Post by abhi764 »

Bogleheads philosophy seems to be a great way to start building wealth. It's simplicity and passive nature is remarkable and suits many busy professionals today. At what point, does it make sense to start exploring more sophisticated investment options in the stock market, beyond index funds?

More specifically:

1. What is X, such that when your net worth exceeds X million dollars, you should explore more sophisticated methods of investing other than just total stock and bond market funds?
2. What are some examples of these sophisticated stock investing methods, that high net worth people use?
RocketShipTech
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Re: Investment strategies for high net worth individuals

Post by RocketShipTech »

I am about to dip my toes into venture capital.
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Random Musings
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Re: Investment strategies for high net worth individuals

Post by Random Musings »

"Sophisticated" investing usually means that you are paying a professional advisor, probably way too much, for the "opportunity" to generate alpha, that you most likely won't get.

But you get to sit in nice offices with comfy chairs. Want a latte?

RM
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livesoft
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Re: Investment strategies for high net worth individuals

Post by livesoft »

I think $X is $10.5 million not including any home nor real estate.
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brad.clarkston
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Re: Investment strategies for high net worth individuals

Post by brad.clarkston »

Betting on the spread has always been sophisticated and not as simple as just randomly picking stocks and lotto numbers based on the kids birthdays.
I think a decent % at any time would be 5-to-10% of your total portfolio anything more would be to much of a gamble.
GuyLafleur
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Re: Investment strategies for high net worth individuals

Post by GuyLafleur »

This ties into a question I was thinking of the other day: is index investing scalable?

Let's say your net worth hits 8 figures. Does it still make sense to just buy-and-hold a 3-fund portfolio, or are there now new risks such as each (large) purchase moving the price of the ETF shares, there not being enough volume on the market to consistently fill your order size, or fraud/loss risks (i.e., insurance not covering the vast majority of the money in your investment accounts if you're ever a victim of fraud)?
Impatience
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Re: Investment strategies for high net worth individuals

Post by Impatience »

Yes index investing is scalable and it’s as appropriate at $100m net worth as it is at $1000. There’s nothing mathematically special about having a lot of money - if the market goes up 5% your hundred million bucks will go up by five million - nice! Your $1000 will go up by $50 - great! That’s perfect scaling if you ask me.

Having more money makes a lot of things more complicated but your investing can stay exactly the same.
GuyLafleur wrote: Tue Aug 18, 2020 8:43 pm This ties into a question I was thinking of the other day: is index investing scalable?

Let's say your net worth hits 8 figures. Does it still make sense to just buy-and-hold a 3-fund portfolio, or are there now new risks such as each (large) purchase moving the price of the ETF shares, there not being enough volume on the market to consistently fill your order size, or fraud/loss risks (i.e., insurance not covering the vast majority of the money in your investment accounts if you're ever a victim of fraud)?
You’d have to have a truly staggering net worth to challenge the liquidity of most of the common ETFs. If you had that much money you could just purchase shares directly from the issuer. Or, just place a lot of smaller orders.
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arcticpineapplecorp.
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Re: Investment strategies for high net worth individuals

Post by arcticpineapplecorp. »

GuyLafleur wrote: Tue Aug 18, 2020 8:43 pm This ties into a question I was thinking of the other day: is index investing scalable?

Let's say your net worth hits 8 figures. Does it still make sense to just buy-and-hold a 3-fund portfolio, or are there now new risks such as each (large) purchase moving the price of the ETF shares, there not being enough volume on the market to consistently fill your order size, or fraud/loss risks (i.e., insurance not covering the vast majority of the money in your investment accounts if you're ever a victim of fraud)?
VOO alone has $560 billion in it.
average volume 3,900,225

VTSAX alone has $917.90 billion in it

I haven't got to fidelity or schwab yet. You want me to?

simplicity is the ultimate form of sophistication.

OP, what makes you think complexity is an advantage in investing?
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
jarjarM
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Re: Investment strategies for high net worth individuals

Post by jarjarM »

I think there's definitely different tax consideration once you get beyond certain dollar amount in the taxable. If marginal tax rate is > 50% (fed 37% + CA 10.3% + NIIT), investment consideration related to tax drag will be substantially different than if one's marginal tax rate in the 20s to 30%. Also, getting beyond certain net worth, investor's ability to take risk will be different so some of the alternative investment may serve well as diversification.
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Re: Investment strategies for high net worth individuals

Post by Dottie57 »

Impatience wrote: Tue Aug 18, 2020 8:46 pm Yes index investing is scalable and it’s as appropriate at $100m net worth as it is at $1000. There’s nothing mathematically special about having a lot of money - if the market goes up 5% your hundred million bucks will go up by five million - nice! Your $1000 will go up by $50 - great! That’s perfect scaling if you ask me.

Having more money makes a lot of things more complicated but your investing can stay exactly the same.
GuyLafleur wrote: Tue Aug 18, 2020 8:43 pm This ties into a question I was thinking of the other day: is index investing scalable?

Let's say your net worth hits 8 figures. Does it still make sense to just buy-and-hold a 3-fund portfolio, or are there now new risks such as each (large) purchase moving the price of the ETF shares, there not being enough volume on the market to consistently fill your order size, or fraud/loss risks (i.e., insurance not covering the vast majority of the money in your investment accounts if you're ever a victim of fraud)?
You’d have to have a truly staggering net worth to challenge the liquidity of most of the common ETFs. If you had that much money you could just purchase shares directly from the issuer. Or, just place a lot of smaller orders.
Thanks. If I won the lottery, I would keep investing in a similar manner. Maybe different types of bonds but same equity that I use now.
flyingcows
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Re: Investment strategies for high net worth individuals

Post by flyingcows »

The co-founder of chewy who sold out of the company for $3 billion invested everything into a “2 stock porfolio” Apple and Wells Fargo:

https://www.bloombergquint.com/business ... ells-fargo

I think he’a on the right track with wanting simplcity, just needs to be nudged into ETFs, maybe he will find this fourm eventually.

Personally, at any level of weath I would always want to self manage and would aim for simplicity, though I would hire tax and legal specialists for advice as needed.
shess
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Re: Investment strategies for high net worth individuals

Post by shess »

GuyLafleur wrote: Tue Aug 18, 2020 8:43 pm This ties into a question I was thinking of the other day: is index investing scalable?

Let's say your net worth hits 8 figures. Does it still make sense to just buy-and-hold a 3-fund portfolio, or are there now new risks such as each (large) purchase moving the price of the ETF shares, there not being enough volume on the market to consistently fill your order size, or fraud/loss risks (i.e., insurance not covering the vast majority of the money in your investment accounts if you're ever a victim of fraud)?
I'd have no problems with a 3-fund portfolio right on up to $100M. At that point, it's not so much that I have an actual problem with the idea, but instead I just can't grapple with such big numbers so I'm no longer confident there isn't something hidden.

That said, I find it hard to imagine that there _would_ be a problem, at least not anything that would make it work materially worse. I'd probably consider hiring someone to just do index replication at that point, though, since it would likely lower your ER and generate some TLH benefits, and maybe some charitable gifting benefits. I wouldn't be surprised if a large holding could be extracted from an ETF with basis intact by using creation units.
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JoMoney
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Re: Investment strategies for high net worth individuals

Post by JoMoney »

If you have a high enough net worth, it really doesn't matter how you decide to waste your money. There's no shortage of people offering "sophisticated stock investing methods". The important thing to realize is that "sophisticated stock investing methods" are more likely than not to have sub-index performance (particularly on a cost adjusted basis)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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eye.surgeon
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Re: Investment strategies for high net worth individuals

Post by eye.surgeon »

abhi764 wrote: Tue Aug 18, 2020 8:11 pm Bogleheads philosophy seems to be a great way to start building wealth. It's simplicity and passive nature is remarkable and suits many busy professionals today. At what point, does it make sense to start exploring more sophisticated investment options in the stock market, beyond index funds?

More specifically:

1. What is X, such that when your net worth exceeds X million dollars, you should explore more sophisticated methods of investing other than just total stock and bond market funds?
2. What are some examples of these sophisticated stock investing methods, that high net worth people use?
There is nothing unsophisticated about boglehead investment principles. I think you may be confusing sophisticated with complicated.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett
euphonious
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Re: Investment strategies for high net worth individuals

Post by euphonious »

In an earlier letter to shareholders, Buffet discloses that his will includes instructions that money left to his wife be invested in 90% S&P500 index fund and 10% short-term government bonds.

https://www.washingtonpost.com/news/won ... invest-in/
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers.
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Re: Investment strategies for high net worth individuals

Post by rob »

shess wrote: Tue Aug 18, 2020 10:28 pm I'd have no problems with a 3-fund portfolio right on up to $100M. At that point, it's not so much that I have an actual problem with the idea, but instead I just can't grapple with such big numbers so I'm no longer confident there isn't something hidden.
Vanguard's got you covered with an index fund..... Nice touch that additional investments are $1 once you get over the initial minimum :D
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TN_Boy
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Re: Investment strategies for high net worth individuals

Post by TN_Boy »

abhi764 wrote: Tue Aug 18, 2020 8:11 pm Bogleheads philosophy seems to be a great way to start building wealth. It's simplicity and passive nature is remarkable and suits many busy professionals today. At what point, does it make sense to start exploring more sophisticated investment options in the stock market, beyond index funds?

More specifically:

1. What is X, such that when your net worth exceeds X million dollars, you should explore more sophisticated methods of investing other than just total stock and bond market funds?
2. What are some examples of these sophisticated stock investing methods, that high net worth people use?
I suggest you read Unconventional Success, by David Swensen. Swensen runs the Yale endowment, which performed brilliantly for many years, and Yale's investment strategies were copied by many smaller endowments. Swensen is a strong advocate of active management .... if you have enough money to pay for the best investments. By which I mean a whole lot of money.

Unconventional Success was written for the average investor. However, Swensen found when he started to write that book that trying to emulate the strategies that had worked for Yale was impossible for the smaller investor (I believe numbers like 50 million would still be "small" in this context). He believes individual investors and smaller endowments should not try Yale's methods, but instead use low cost index funds.

He might be wrong of course, but it should give one pause that an advocate and user of active management (who is certainly NOT making any money selling anything to you and I) would strongly urge even high net worth individuals to stay with passive investments. If you are still not convinced, you can read his book on some of the strategies Yale does use (Pioneering Portfolio Management) and give them a whirl!

That said, when the money starts getting more serious (much north of 10m I'd think) one should definitely be thinking about estate plans, intelligent tax management, etc.

But to specifically answer your question, an indexed portfolio of stocks and bonds can be very tax efficient and would work quite well for someone with even 100 million dollars. And you won't have to worry about whether or not you actually understand these investments.
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Re: Investment strategies for high net worth individuals

Post by BogleFan510 »

Sometimes this forum focuses so much on maximizing returns, we lose touch with why one accumulates wealth to begin with.

At that level of wealth, it has been pointed out that an index investing approach is fine. I would advise one spend effort researching how best to 'use' the wealth, not how best to 'accumulate more.' Gates is an excellent role model in this regard.

Wealth should be a means to an end, not an end unto itself. Accumulated wealth without a purpose is a wasted asset of human society. That said, there are many ready to manage it poorly for a cut.
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Re: Investment strategies for high net worth individuals

Post by flaccidsteele »

abhi764 wrote: Tue Aug 18, 2020 8:11 pm More specifically:

1. What is X, such that when your net worth exceeds X million dollars, you should explore more sophisticated methods of investing other than just total stock and bond market funds?
2. What are some examples of these sophisticated stock investing methods, that high net worth people use?
1. It’s a high upper bound. Billions for sure. Not sure how many billion. A low fee US index is a really really tough opponent to beat

2. Always buy and Buy more when markets crash is the simplest way to boost returns
Last edited by flaccidsteele on Tue Aug 18, 2020 11:31 pm, edited 1 time in total.
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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JoMoney
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Re: Investment strategies for high net worth individuals

Post by JoMoney »

While you're not likely to be able to buy better "investment" performance, there are other matters, like tax management, estate planning, and asset protection strategies that may impact higher net worth individuals differently.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Investment strategies for high net worth individuals

Post by 2tall4economy »

For me it's whatever can weather the worst drawdowns we've seen in our history and still be able to withdraw 4% without running out of money. Probably somewhere around $6M to $10M before I'd feel like I couldn't really lose what I built.

Beyond that, it's funny money used for entertainment, gambling, buying influence, hobbies, etc...

One of your hobbies might be private equity or stock picking or whatever, and if so knock yourself out. But I'd keep whatever the minimum is in the 3 fund (or similar) portfolio.

I like this book:

https://www.amazon.com/Only-Guide-Alter ... B003NE61GC
You can do anything you want in life. The rub is that there are consequences.
shess
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Re: Investment strategies for high net worth individuals

Post by shess »

rob wrote: Tue Aug 18, 2020 10:58 pm
shess wrote: Tue Aug 18, 2020 10:28 pm I'd have no problems with a 3-fund portfolio right on up to $100M. At that point, it's not so much that I have an actual problem with the idea, but instead I just can't grapple with such big numbers so I'm no longer confident there isn't something hidden.
Vanguard's got you covered with an index fund..... Nice touch that additional investments are $1 once you get over the initial minimum :D
Yeah, I have access to a couple institutional-plus funds via my 401k. Hopefully someday I'll have enough to maintain that access when I rollover to an IRA to get rid of the $5/quarter admin fee :-).
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Re: Investment strategies for high net worth individuals

Post by 123 »

If you can come up with the $100 million minimum you may be able to arrange to hold shares in Vanguard Total Stock Market Fund Institutional Plus. They have an expense ratio of only .02% so there are definately some economies of scale available.
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Re: Investment strategies for high net worth individuals

Post by venkman »

If you have enough that you know you'll never need to sell anything, you can buy and hold infrequently-traded municipal bonds to get the liquidity premium. When you can buy in large lots, the commissions aren't as bad. At some level of wealth, a dedicated bond portfolio manager might even be able to add value.
kiwi123
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Re: Investment strategies for high net worth individuals

Post by kiwi123 »

abhi764 wrote: Tue Aug 18, 2020 8:11 pm Bogleheads philosophy seems to be a great way to start building wealth. It's simplicity and passive nature is remarkable and suits many busy professionals today. At what point, does it make sense to start exploring more sophisticated investment options in the stock market, beyond index funds?

More specifically:

1. What is X, such that when your net worth exceeds X million dollars, you should explore more sophisticated methods of investing other than just total stock and bond market funds?
2. What are some examples of these sophisticated stock investing methods, that high net worth people use?
My take is that after adjusting for risk and expenses, more "sophisticated" investing methods aren't going to beat low cost index funds.

However, you may decide to engage in more risky (with potentially higher returns) investments for other reasons once you've reached a personal point of financial independence. That number is different for everyone but a good starting point could be 30x annual expenses. Once you know you're "set for life" you may be interested in things like angel investing/"friends & family" to get small businesses off the ground; vc funds, private equity, or even investing in individual stocks!
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Re: Investment strategies for high net worth individuals

Post by Grt2bOutdoors »

Once you’ve reached $200 million you can explore placing a 10 percent slice in private equity. Note, I said private equity, not hedge funds.
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ReadyOrNot
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Re: Investment strategies for high net worth individuals

Post by ReadyOrNot »

If you accumulate more than Warren Buffet you may want to consider something more sophisticated than his index-based strategy for what he will leave behind.
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steve321
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Re: Investment strategies for high net worth individuals

Post by steve321 »

how about investing with Bridgewater if you have enough assets? It's the one hedgefund I would trust: probably you'd get capital appreciation with a much smoother ride.
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Harry Livermore
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Re: Investment strategies for high net worth individuals

Post by Harry Livermore »

JoMoney wrote: Tue Aug 18, 2020 11:31 pm While you're not likely to be able to buy better "investment" performance, there are other matters, like tax management, estate planning, and asset protection strategies that may impact higher net worth individuals differently.
+1
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statman
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Re: Investment strategies for high net worth individuals

Post by statman »

From Warren Buffett's 1996 letter to investors: "The wealthy
are accustomed to feeling that it is their lot in life to get the best
food, schooling, entertainment, housing, plastic surgery, sports ticket,
you name it. Their money, they feel, should buy them something superior
compared to what the masses receive. In many aspects of life, indeed,
wealth does command top-grade products or services. For that reason,
the financial 'elites' -- wealthy individuals, pension funds, college
endowments and the like -- have great trouble meekly signing up for a
financial product or service that is available as well to people investing
only a few thousand dollars. This reluctance of the rich normally prevails
even though the product at issue is -- on an expectancy basis -- clearly
the best choice. My calculation, admittedly very rough, is that the search
by the elite for superior investment advice has caused it, in aggregate,
to waste more than $100 billion over the past decade."
senex
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Re: Investment strategies for high net worth individuals

Post by senex »

1. Warren Buffett offered a bet that S&P 500 would beat any 5 hedge funds chosen by a challenger. Only one person had the guts to take the bet, and that manager lost to the S&P 500.

2. Nevada's pension fund, which is one guy in a strip mall buying index funds, has consistently outperformed Calpers and other funds that spend multi-millions on professional managers, hedge funds, private equity, etc.

3. New York City's internal analysis showed that any excess return generated by non-index strategies is captured in fees, leaving NYC with no net benefit.

4. Buffett's 2016 Letter:
The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive. In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites” – wealthy individuals, pension funds, college endowments and the like – have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is – on an expectancy basis – clearly the best choice.
[...]
Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something “extra” in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”

[1] https://berkshirehathaway.com/letters/2017ltr.pdf page 10, “The Bet is Over and Has Delivered an Unforeseen Investment Lesson"
[2] https://www.wsj.com/articles/what-does- ... 1476887420 (may be behind paywall. key quote: "From his one-story office building in Carson City, Mr. Edmundson commands funds whose returns over one-year, three-year, five-year and 10-year periods ending June 30 bested the nation’s largest public pension, the California Public Employees’ Retirement System, or Calpers,
and deeply-staffed plans of many other states."
[3] https://www.nytimes.com/2015/08/22/your ... arket.html (may be behind paywall. key quote: "Earlier this year, the New York City comptroller issued a report concluding that nearly all of the outperformance it achieved in investments like the ones that Nevada now indexes went into the pockets of the outside managers who achieved them, in the form of fees."
[4] https://berkshirehathaway.com/letters/2016ltr.pdf
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abhi764
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Re: Investment strategies for high net worth individuals

Post by abhi764 »

shess wrote: Tue Aug 18, 2020 10:28 pm
GuyLafleur wrote: Tue Aug 18, 2020 8:43 pm This ties into a question I was thinking of the other day: is index investing scalable?

Let's say your net worth hits 8 figures. Does it still make sense to just buy-and-hold a 3-fund portfolio, or are there now new risks such as each (large) purchase moving the price of the ETF shares, there not being enough volume on the market to consistently fill your order size, or fraud/loss risks (i.e., insurance not covering the vast majority of the money in your investment accounts if you're ever a victim of fraud)?
I'd have no problems with a 3-fund portfolio right on up to $100M. At that point, it's not so much that I have an actual problem with the idea, but instead I just can't grapple with such big numbers so I'm no longer confident there isn't something hidden.

That said, I find it hard to imagine that there _would_ be a problem, at least not anything that would make it work materially worse. I'd probably consider hiring someone to just do index replication at that point, though, since it would likely lower your ER and generate some TLH benefits, and maybe some charitable gifting benefits. I wouldn't be surprised if a large holding could be extracted from an ETF with basis intact by using creation units.
Thanks everyone for sharing your thoughts! Some institutions (like Personal Capital) start pitching to do Index Replication by buying individual stocks for a fee of 0.7% of NAM (Net Assets under Management). I was wondering at what point does doing something like this make sense? And suppose you do this at $10M, then does paying 0.7% of that i.e. $70K per year to Personal Capital make sense?
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Re: Investment strategies for high net worth individuals

Post by geerhardusvos »

abhi764 wrote: Wed Aug 19, 2020 9:19 pm
shess wrote: Tue Aug 18, 2020 10:28 pm
GuyLafleur wrote: Tue Aug 18, 2020 8:43 pm This ties into a question I was thinking of the other day: is index investing scalable?

Let's say your net worth hits 8 figures. Does it still make sense to just buy-and-hold a 3-fund portfolio, or are there now new risks such as each (large) purchase moving the price of the ETF shares, there not being enough volume on the market to consistently fill your order size, or fraud/loss risks (i.e., insurance not covering the vast majority of the money in your investment accounts if you're ever a victim of fraud)?
I'd have no problems with a 3-fund portfolio right on up to $100M. At that point, it's not so much that I have an actual problem with the idea, but instead I just can't grapple with such big numbers so I'm no longer confident there isn't something hidden.

That said, I find it hard to imagine that there _would_ be a problem, at least not anything that would make it work materially worse. I'd probably consider hiring someone to just do index replication at that point, though, since it would likely lower your ER and generate some TLH benefits, and maybe some charitable gifting benefits. I wouldn't be surprised if a large holding could be extracted from an ETF with basis intact by using creation units.
Thanks everyone for sharing your thoughts! Some institutions (like Personal Capital) start pitching to do Index Replication by buying individual stocks for a fee of 0.7% of NAM (Net Assets under Management). I was wondering at what point does doing something like this make sense? And suppose you do this at $10M, then does paying 0.7% of that i.e. $70K per year to Personal Capital make sense?
It never makes sense. Seriously.
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Re: Investment strategies for high net worth individuals

Post by flaccidsteele »

abhi764 wrote: Wed Aug 19, 2020 9:19 pm
shess wrote: Tue Aug 18, 2020 10:28 pm
GuyLafleur wrote: Tue Aug 18, 2020 8:43 pm This ties into a question I was thinking of the other day: is index investing scalable?

Let's say your net worth hits 8 figures. Does it still make sense to just buy-and-hold a 3-fund portfolio, or are there now new risks such as each (large) purchase moving the price of the ETF shares, there not being enough volume on the market to consistently fill your order size, or fraud/loss risks (i.e., insurance not covering the vast majority of the money in your investment accounts if you're ever a victim of fraud)?
I'd have no problems with a 3-fund portfolio right on up to $100M. At that point, it's not so much that I have an actual problem with the idea, but instead I just can't grapple with such big numbers so I'm no longer confident there isn't something hidden.

That said, I find it hard to imagine that there _would_ be a problem, at least not anything that would make it work materially worse. I'd probably consider hiring someone to just do index replication at that point, though, since it would likely lower your ER and generate some TLH benefits, and maybe some charitable gifting benefits. I wouldn't be surprised if a large holding could be extracted from an ETF with basis intact by using creation units.
Thanks everyone for sharing your thoughts! Some institutions (like Personal Capital) start pitching to do Index Replication by buying individual stocks for a fee of 0.7% of NAM (Net Assets under Management). I was wondering at what point does doing something like this make sense? And suppose you do this at $10M, then does paying 0.7% of that i.e. $70K per year to Personal Capital make sense?
No

$10m isn’t enough to be worth it imo

I’m close to that amount and I wouldn’t pay $70k for something I can do myself

The “number” will involve at least 3 commas
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
shess
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Re: Investment strategies for high net worth individuals

Post by shess »

abhi764 wrote: Wed Aug 19, 2020 9:19 pm
shess wrote: Tue Aug 18, 2020 10:28 pm
GuyLafleur wrote: Tue Aug 18, 2020 8:43 pm This ties into a question I was thinking of the other day: is index investing scalable?

Let's say your net worth hits 8 figures. Does it still make sense to just buy-and-hold a 3-fund portfolio, or are there now new risks such as each (large) purchase moving the price of the ETF shares, there not being enough volume on the market to consistently fill your order size, or fraud/loss risks (i.e., insurance not covering the vast majority of the money in your investment accounts if you're ever a victim of fraud)?
I'd have no problems with a 3-fund portfolio right on up to $100M. At that point, it's not so much that I have an actual problem with the idea, but instead I just can't grapple with such big numbers so I'm no longer confident there isn't something hidden.

That said, I find it hard to imagine that there _would_ be a problem, at least not anything that would make it work materially worse. I'd probably consider hiring someone to just do index replication at that point, though, since it would likely lower your ER and generate some TLH benefits, and maybe some charitable gifting benefits. I wouldn't be surprised if a large holding could be extracted from an ETF with basis intact by using creation units.
Thanks everyone for sharing your thoughts! Some institutions (like Personal Capital) start pitching to do Index Replication by buying individual stocks for a fee of 0.7% of NAM (Net Assets under Management). I was wondering at what point does doing something like this make sense? And suppose you do this at $10M, then does paying 0.7% of that i.e. $70K per year to Personal Capital make sense?
What the various places like Wealthfront and others are trying to do is convince you that you need this complicated thing that they can provide. I'm not quite making that argument. Rather, I think that the complications of managing such a portfolio are essentially a flat cost, so at some point it might make sense to shift from paying basis points to simply paying a flat fee, and then you get a couple other things like TLH for free.

I didn't actually do the math, though. $100M in a 3-fund Vanguard index-fund portfolio would only have an ER cost of like $50k/year, that's not enough to put someone on staff to do it for you. But I'd certainly consider calling one of these companies and trying to negotiate a better rate (though realize they're going to pester you about additional "valuable services" FOREVER). Of course, with that big of a portfolio you might start to have people on staff for other reasons who could take this job on for comparable costs.

AFAICT the index-replication services those companies offer is MOSTLY a way to tie you to the company. It's hard to shift providers when you have a portfolio of 750 positions distributed across thousands of lots. They put up a bunch of papers about things like tax-loss harvesting, but tax-loss harvesting advantage decays over time, so provides benefits scaled more to your annual investment rate than to your portfolio size. If you had $10M, you PROBABLY have substantial positions that are so far in the money that you aren't going to ever see losses on most of them. I found those offerings interesting in a dry theoretical sense, but not compelling enough to draw my portfolio.
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simplesimon
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Re: Investment strategies for high net worth individuals

Post by simplesimon »

Let’s flip it...other than getting access why wouldn’t a strategy for HNW individual work for someone with low net worth? Are we talking about ROI or tax management?
arf30
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Re: Investment strategies for high net worth individuals

Post by arf30 »

I'd say the direct indexing strategy becomes worth it when the tax savings + avoiding index fund ER becomes greater than the 150k/year salary you'd pay a guy to run your family office and do the direct indexing. Probably somewhere North of 50 million.
MJS
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Re: Investment strategies for high net worth individuals

Post by MJS »

Securities Lending.

Create your very own personal S&P500 robo-managed index fund, like Fidelity Zero. At some point, theoretically, the profits from Securities Lending will pay for the taxes, wages, fees, and other infrastructure costs. $100 million? $10 billion?

Sources:
Several Boglehead threads.
https://www.investopedia.com/terms/s/se ... ending.asp
Robot Monster
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Re: Investment strategies for high net worth individuals

Post by Robot Monster »

Where to Invest $1 Million Right Now
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"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
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abhi764
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Re: Investment strategies for high net worth individuals

Post by abhi764 »

shess wrote: Thu Aug 20, 2020 2:12 am
abhi764 wrote: Wed Aug 19, 2020 9:19 pm
shess wrote: Tue Aug 18, 2020 10:28 pm
GuyLafleur wrote: Tue Aug 18, 2020 8:43 pm This ties into a question I was thinking of the other day: is index investing scalable?

Let's say your net worth hits 8 figures. Does it still make sense to just buy-and-hold a 3-fund portfolio, or are there now new risks such as each (large) purchase moving the price of the ETF shares, there not being enough volume on the market to consistently fill your order size, or fraud/loss risks (i.e., insurance not covering the vast majority of the money in your investment accounts if you're ever a victim of fraud)?
I'd have no problems with a 3-fund portfolio right on up to $100M. At that point, it's not so much that I have an actual problem with the idea, but instead I just can't grapple with such big numbers so I'm no longer confident there isn't something hidden.

That said, I find it hard to imagine that there _would_ be a problem, at least not anything that would make it work materially worse. I'd probably consider hiring someone to just do index replication at that point, though, since it would likely lower your ER and generate some TLH benefits, and maybe some charitable gifting benefits. I wouldn't be surprised if a large holding could be extracted from an ETF with basis intact by using creation units.
Thanks everyone for sharing your thoughts! Some institutions (like Personal Capital) start pitching to do Index Replication by buying individual stocks for a fee of 0.7% of NAM (Net Assets under Management). I was wondering at what point does doing something like this make sense? And suppose you do this at $10M, then does paying 0.7% of that i.e. $70K per year to Personal Capital make sense?
What the various places like Wealthfront and others are trying to do is convince you that you need this complicated thing that they can provide. I'm not quite making that argument. Rather, I think that the complications of managing such a portfolio are essentially a flat cost, so at some point it might make sense to shift from paying basis points to simply paying a flat fee, and then you get a couple other things like TLH for free.

I didn't actually do the math, though. $100M in a 3-fund Vanguard index-fund portfolio would only have an ER cost of like $50k/year, that's not enough to put someone on staff to do it for you. But I'd certainly consider calling one of these companies and trying to negotiate a better rate (though realize they're going to pester you about additional "valuable services" FOREVER). Of course, with that big of a portfolio you might start to have people on staff for other reasons who could take this job on for comparable costs.

AFAICT the index-replication services those companies offer is MOSTLY a way to tie you to the company. It's hard to shift providers when you have a portfolio of 750 positions distributed across thousands of lots. They put up a bunch of papers about things like tax-loss harvesting, but tax-loss harvesting advantage decays over time, so provides benefits scaled more to your annual investment rate than to your portfolio size. If you had $10M, you PROBABLY have substantial positions that are so far in the money that you aren't going to ever see losses on most of them. I found those offerings interesting in a dry theoretical sense, but not compelling enough to draw my portfolio.
This makes a lot of sense. Thank you for taking the time to write out your perspectives! Have you ever considered, using flat rate aka advice only financial advisors? Is there some value in that? Harry Sit from "The Finance Buff" seems to be a popular proponent of this idea and running his own service for connecting you with "advice only advisors for a flat rate".
afan
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Re: Investment strategies for high net worth individuals

Post by afan »

With high enough assets, one could develop a targeted portfolio that balances out other risk.
Got rich as an executive for a giant company and still hold lots of company stock? Build the rest of your portfolio around this so that you mitigate this unbalanced risk.
Have much of your wealth tied up in one or more closely held businesses? Build a portfolio around that.

For your base stock exposure, use VTI. But if half your money is in Exxon stock and you cannot sell without losing your job as CEO, then you need to do something to reduce your exposure. Short the oil industry? Sell futures, do something that avoids insider trading but limits your risk on the fortunes of the oil market and one company in that market.

One COULD consider direct ownership of real estate with good diversification across regions and types of properties.
COULD consider private equity. At some point individuals get wealthy enough to buy their way into funds run by the most successful managers. There is some evidence that PE performance persists and it may be worth investing with the top people.
But no NEED to use these less liquid alternatives.
Spread assets across countries, including holding some outside of the US.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
Bobby206
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Re: Investment strategies for high net worth individuals

Post by Bobby206 »

abhi764 wrote: Tue Aug 18, 2020 8:11 pm Bogleheads philosophy seems to be a great way to start building wealth. It's simplicity and passive nature is remarkable and suits many busy professionals today. At what point, does it make sense to start exploring more sophisticated investment options in the stock market, beyond index funds?

More specifically:

1. What is X, such that when your net worth exceeds X million dollars, you should explore more sophisticated methods of investing other than just total stock and bond market funds?
2. What are some examples of these sophisticated stock investing methods, that high net worth people use?
I think this is a good question. I think most of us agree diversification is good and taking too much risk is generally bad. If you have enough net worth that you can put 5% of your net worth into a completely different asset like a hedge fund AND you want to diversify beyond a standard boglehead portfolio than go for it. I think that number is different for different people. Some people consider $5m "high net worth" and some people consider $15m "not high net worth." However, whatever your number is I do think there is a point where it makes sense for a lot of us to diversify into something else. On the other hand I think many people who post on this website are happy with their 3 fund portfolio and no matter what their net worth is they wouldn't want to throw any money into a hedge fund and I can't fault that. As to what to invest in I would think hedge funds and maybe some "risky" real estate syndication deals. I saw one the other day which is a real estate deal paying about 16% but it's in some type of cannabis operation. Too risky and not my cup of tea but if I had higher net worth maybe I'd throw $50k or $100k at it!?

Definitely an interesting question though!
kabob
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Re: Investment strategies for high net worth individuals

Post by kabob »

Use Computer Aided Investment Management!
Or
AI Directed Investment Strategies!
Works for Me...
(But i started as a BogleHead)
Seasonal
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Re: Investment strategies for high net worth individuals

Post by Seasonal »

I don't believe you're going to find an investment strategy that is better than a few index funds. You can always find something better in hindsight. There are a lot of advisors out there selling sophisticated strategies to UHNW investors, but sophisticated really just means more profitable for the advisor and perhaps an ego boost for the investor who doesn't check performance against benchmarks.

The only exception I can think of is what afan described - you have a large portion of your net worth tied up in a single company stock and tax costs of selling to diversify would be high. There might be some ways to deal with that situation. That's more tax planning than an investment strategy.

As many have noted, it's hard to find a more sophisticated investor than Warren Buffett and he recommends an S&P 500 index plus bonds.
RAchip
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Re: Investment strategies for high net worth individuals

Post by RAchip »

I have 8 figures invested. I used to have it managed by a large well known private bank. I understand business and finance and investing. After a little over a year I realized that they just buy stocks and bonds (you can do that yourself for free) and the more exotic products they add to your portfolio are not anything I am interested in. No matter how much money I had I would (and do) put most of it in US common stocks. I have a good bit in Vanguards S&P 500 Index Fund but I also have more in a portfolio of individual stocks in a brokerage account I “manage” (I mostly buy and hold forever). I have about 20 stocks in there. I add to positions when they seem attractive to me. I do have some municipal bonds I bought back when rates were higher (I would not buy bonds now - no return). And I hold a fair amount of cash so that I have fully liquid “optionality” — anything I decide to do I always have plenty of cash to do it.

Basically, my view is that no matter how much money you have, just buy some big established successful American companies. You can do that most simply via an S&P fund or you can pick the stocks you like yourself (or some of both). Forget any exotic stuff.
whyamihere
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Re: Investment strategies for high net worth individuals

Post by whyamihere »

jarjarM wrote: Tue Aug 18, 2020 9:25 pm I think there's definitely different tax consideration once you get beyond certain dollar amount in the taxable. If marginal tax rate is > 50% (fed 37% + CA 10.3% + NIIT), investment consideration related to tax drag will be substantially different than if one's marginal tax rate in the 20s to 30%. Also, getting beyond certain net worth, investor's ability to take risk will be different so some of the alternative investment may serve well as diversification.
Not that it makes it go away, but tax deferral at those levels can really bring up the taxable equivalent yield. A multi-year guaranteed annuity from an A rated carrier at 2.5% becomes 5% if the marginal is 50%. It's tax deferral, not magic, but maybe you defer it until your heirs get to split the taxes over many years at lower rates or you take it out opportunistically year by year. I wouldnt call it alternative in the technical sense but it is an alternative to what many people know to do. Could be a better option than a CD right now.
--------------------------------------------------------- | caveat lector
rockstar
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Re: Investment strategies for high net worth individuals

Post by rockstar »

I think, I would go the Buffet route. Instead of buying equities, I would buy businesses.
000
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Re: Investment strategies for high net worth individuals

Post by 000 »

Yes, direct indexing, and outright ownership of private business/land.
Xrayman69
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Re: Investment strategies for high net worth individuals

Post by Xrayman69 »

You only have to get rich once. Rich is a personal definition heavily based upon lifestyle and income history.

Tax efficiency based upon income and future goals is likely a influencing factor (generational wealth and inheritance). The form in which wealth is based (cash, equities/bonds, business, land/real estate.....)
shess
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Re: Investment strategies for high net worth individuals

Post by shess »

abhi764 wrote: Thu Aug 20, 2020 7:30 pm This makes a lot of sense. Thank you for taking the time to write out your perspectives! Have you ever considered, using flat rate aka advice only financial advisors? Is there some value in that? Harry Sit from "The Finance Buff" seems to be a popular proponent of this idea and running his own service for connecting you with "advice only advisors for a flat rate".
Personally, I'd go for advice-only flat-rate advisors with a fiduciary duty. Flat-rate advisors should be able to accomplish this, because they simply don't have much incentive to direct you to inappropriate assets. I mean, they of course might or might not be good at their jobs, but you want to make sure they don't get paid more to do a bad job. I believe that if an advisor has a fiduciary duty, they are required to disclose it, and if they do not, it is illegal to claim it. So if they immediately launch into a discussion of how it doesn't matter at all, then they do not.

I'd accept an assets-under-management advisor such as Vanguard's Personal Advisor if my portfolio was of a size that couldn't really support a flat-rate advisor (like from their minimum of $50k to maybe $300k or $500k).

(Well, actually, I don't hire financial advisors because I don't want to pay someone a high rate to argue with them for an hour about trivial things. I'm gradually getting over that tendency, though, so I have considered getting a flat-rate advisor so that if something happened to me there would be an existing relationship my spouse could depend on.)
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