Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

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Sandtrap
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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by Sandtrap » Thu Jul 11, 2019 9:39 pm

teelainen wrote:
Thu Jul 11, 2019 6:25 pm
SuperSaver1975 wrote:
Thu Jul 11, 2019 1:05 pm
I'm glad I discovered this site and the concept of the 3 Fund Portfolio. My question to OP is, why bother with anything besides the 3 Fund Portfolio? Set it and forget it. Live life.
I love the 3 Fund Portfolio. But sometimes the asset allocation of the ultra-wealthy can withstand market crashes a little better. So it doesn't hurt to know what the ultra-wealthy hold in their portfolio, and perhaps even incorporate a tiny bit of their strategy into your own portfolio.
Someone with a substantial income stream, pensions, SS, etc, can survive market downturns a lot better than another person with a similar portfolio but only a minimal income stream.

The point here is that those with substantial wealth (let alone ultra wealth), have a level of "staying power" and "deep pockets" that allows them to invest differently than average "Joe Public", no matter their portfolio composition.

For "Joe Public" to try to emulate the portfolio's of those with great wealth, in the hopes of attaining that level of substantial wealth on that basis alone, seems silly.

But, everyone is different and there may indeed be instances of success.
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22twain
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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by 22twain » Thu Jul 11, 2019 10:09 pm

whodidntante wrote:
Thu Jul 11, 2019 12:29 pm
Berkshire Hathaway owns several small businesses
Like BNSF Railway... :wink:
My investing princiPLEs do not include absolutely preserving princiPAL.

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teelainen
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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by teelainen » Thu Jul 11, 2019 10:38 pm

David Jay wrote:
Thu Jul 11, 2019 6:41 pm
teelainen wrote:
Thu Jul 11, 2019 6:25 pm
But sometimes the asset allocation of the ultra-wealthy can withstand market crashes a little better.
Do you have any basis for this statement? I would propose that a single investment in a 40/60 3-fund or even LifeStrategy Conservative (40/60) would have less drawdown in a crash than the average portfolio of the TIGER21 participants (remember, this is an average of the different participants, not a specific portfolio recommendation).
Yes, I do have basis for this statement about the market crash. One of my long-time high school friends has a similar portfolio to the one mentioned in the opening post. Half of his net worth was in his private businesses and real estate holdings during the 2008 downturn. He owned 3 restaurant supply warehouses (in 3 different locations throughout the state) and he owned several Class C strip malls. The other half of his net worth was in financial assets, although I never knew the mix of stocks/bonds he had at the time. Similar to the portfolio in the opening post, he also held a lot of cash so he did private lending as well. During the 2008 downturn, his net worth and income was hardly impacted at all and he was able to use that strength to acquire even more assets at great prices for the next several years.

Meanwhile, I knew other folks who held mostly mutual funds and bonds that lost about 25%-33% of their net worth during the downturn. It took 5-6 years for some of those people to get back to their original net worth, but even worse was the fact that they didn't have the money during the downturn to acquire more assets (when everything was on sale).

Today in 2019, this same high school friend has expanded his restaurant supply business to 6 locations (across 2 states) and has expanded his commercial real estate holdings to include warehouse space and special-purpose facilities. His Fidelity and Schwab accounts are doing just fine too (8 digits).

If the stock market crashes again, I am willing to bet that my high school friend will be able to withstand it a little better than someone with a 3 Fund Portfolio only (depending on the AA).

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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by Thesaints » Fri Jul 12, 2019 12:12 am

Looks like a pretty narrow basis...

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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by HawkeyePierce » Fri Jul 12, 2019 1:08 am

teelainen wrote:
Thu Jul 11, 2019 10:38 pm
David Jay wrote:
Thu Jul 11, 2019 6:41 pm
teelainen wrote:
Thu Jul 11, 2019 6:25 pm
But sometimes the asset allocation of the ultra-wealthy can withstand market crashes a little better.
Do you have any basis for this statement? I would propose that a single investment in a 40/60 3-fund or even LifeStrategy Conservative (40/60) would have less drawdown in a crash than the average portfolio of the TIGER21 participants (remember, this is an average of the different participants, not a specific portfolio recommendation).
Yes, I do have basis for this statement about the market crash. One of my long-time high school friends has a similar portfolio to the one mentioned in the opening post. Half of his net worth was in his private businesses and real estate holdings during the 2008 downturn. He owned 3 restaurant supply warehouses (in 3 different locations throughout the state) and he owned several Class C strip malls. The other half of his net worth was in financial assets, although I never knew the mix of stocks/bonds he had at the time. Similar to the portfolio in the opening post, he also held a lot of cash so he did private lending as well. During the 2008 downturn, his net worth and income was hardly impacted at all and he was able to use that strength to acquire even more assets at great prices for the next several years.

Meanwhile, I knew other folks who held mostly mutual funds and bonds that lost about 25%-33% of their net worth during the downturn. It took 5-6 years for some of those people to get back to their original net worth, but even worse was the fact that they didn't have the money during the downturn to acquire more assets (when everything was on sale).

Today in 2019, this same high school friend has expanded his restaurant supply business to 6 locations (across 2 states) and has expanded his commercial real estate holdings to include warehouse space and special-purpose facilities. His Fidelity and Schwab accounts are doing just fine too (8 digits).

If the stock market crashes again, I am willing to bet that my high school friend will be able to withstand it a little better than someone with a 3 Fund Portfolio only (depending on the AA).
These aren’t comparable. Owning and expanding your own businesses is nothing like holding a passive portfolio. One requires a level of commitment and risk-taking few have, one does not.

Consequently, the potential returns are also higher but so are the risks. What if your friend’s restaurant supply business had been concentrated in areas that became economically distressed and it went under?

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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by nisiprius » Fri Jul 12, 2019 6:02 am

Nassim Nicholas Taleb, Skin in the Game, p. 167:
It is easy to scam people by getting them into complications--the poor are spared that kind of scamming. This is the same complication we saw in chapter 9 that makes academics sell the most possibly complicated solution when a simple one will do. Further, the rich start using "experts" and "consultants." An entire industry meant to swindle you will swindle you...
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David Jay
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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by David Jay » Fri Jul 12, 2019 7:30 am

Thesaints wrote:
Fri Jul 12, 2019 12:12 am
Looks like a pretty narrow basis...
Sample size n=1
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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by GCD » Fri Jul 12, 2019 9:06 am

teelainen wrote:
Thu Jul 11, 2019 10:38 pm
Yes, I do have basis for this statement about the market crash. One of my long-time high school friends has a similar portfolio to the one mentioned in the opening post. Half of his net worth was in his private businesses and real estate holdings during the 2008 downturn. He owned 3 restaurant supply warehouses (in 3 different locations throughout the state) and he owned several Class C strip malls. The other half of his net worth was in financial assets, although I never knew the mix of stocks/bonds he had at the time. Similar to the portfolio in the opening post, he also held a lot of cash so he did private lending as well. During the 2008 downturn, his net worth and income was hardly impacted at all and he was able to use that strength to acquire even more assets at great prices for the next several years.
Owning your own business is different than investing in PE. Especially the way an ordinary person would do it. Unless you have a big enough sum to invest that you have control over what is going on, you are just along for the ride, albeit with higher fees than if you invested in something else. This is not the same as running your own business where you control things. I think it is a mistake to equate running your own business with investing in PE. (You seem to be implying his business filled the role of PE, if I took that wrong, my apologies. If you aren't equating running his own business to PE, then where is the PE in his portfolio?).

There are lots of shopping malls and commercial property that are an albatross for their owners. The devil is in the details. Just investing in real estate is a flippant suggestion. So the rich invest in RE? How exactly do you do that successfully? Que several books worth of discussion to answer that. It certainly isn't as simple as making it X% of your AA. During 2008 there were lots of rich people with real estate problems.
teelainen wrote:
Thu Jul 11, 2019 10:38 pm
Meanwhile, I knew other folks who held mostly mutual funds and bonds that lost about 25%-33% of their net worth during the downturn. It took 5-6 years for some of those people to get back to their original net worth, but even worse was the fact that they didn't have the money during the downturn to acquire more assets (when everything was on sale).
For better or worse, I had an above average, but not spectacular salary as a federal employee. I weathered every downturn from 1995 until now at 100% stock. Looking back, I was down 12% in 2008 and up 29% in 2009. The keys to weathering downturns are discipline, liquidity and LBYM. As federal employees who LBYM, my wife and I were able to continue buying throughout the downturn. Discipline, liquidity and LBYM are not baked into any AA. Even high allocations to cash won't save you if you aren't LBYM. You don't need to be wealthy or ultra-wealthy to weather a downturn.

Those people you know who took 5-6 years to return to their original net worth lacked discipline. They had to have panicked and sold at the bottom.

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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by pyld76 » Fri Jul 12, 2019 9:28 am

teelainen wrote:
Thu Jul 11, 2019 10:38 pm
David Jay wrote:
Thu Jul 11, 2019 6:41 pm
teelainen wrote:
Thu Jul 11, 2019 6:25 pm
But sometimes the asset allocation of the ultra-wealthy can withstand market crashes a little better.
Do you have any basis for this statement? I would propose that a single investment in a 40/60 3-fund or even LifeStrategy Conservative (40/60) would have less drawdown in a crash than the average portfolio of the TIGER21 participants (remember, this is an average of the different participants, not a specific portfolio recommendation).
Yes, I do have basis for this statement about the market crash. One of my long-time high school friends has a similar portfolio to the one mentioned in the opening post. Half of his net worth was in his private businesses and real estate holdings during the 2008 downturn. He owned 3 restaurant supply warehouses (in 3 different locations throughout the state) and he owned several Class C strip malls. The other half of his net worth was in financial assets, although I never knew the mix of stocks/bonds he had at the time. Similar to the portfolio in the opening post, he also held a lot of cash so he did private lending as well. During the 2008 downturn, his net worth and income was hardly impacted at all and he was able to use that strength to acquire even more assets at great prices for the next several years.

Meanwhile, I knew other folks who held mostly mutual funds and bonds that lost about 25%-33% of their net worth during the downturn. It took 5-6 years for some of those people to get back to their original net worth, but even worse was the fact that they didn't have the money during the downturn to acquire more assets (when everything was on sale).

Today in 2019, this same high school friend has expanded his restaurant supply business to 6 locations (across 2 states) and has expanded his commercial real estate holdings to include warehouse space and special-purpose facilities. His Fidelity and Schwab accounts are doing just fine too (8 digits).

If the stock market crashes again, I am willing to bet that my high school friend will be able to withstand it a little better than someone with a 3 Fund Portfolio only (depending on the AA).
Your high school friend is holding hard to value and (relative to a mutual fund) illiquid assets which produce cash. His income might not have been impacted (if it was coming from his business operations). A fixed income portfolio or one made up of high dividend equity would’ve done the same thing. Depending upon the states, his actual net worth may have dropped based on the real estate holdings. If he didn’t have to sell, it doesn’t matter, and so he probably never considered it.

During the 2008 crisis, my equities lost value. I didn’t have to sell. It didn’t matter.

Your high school friend was “able to withstand it” because of the size of pile, not because of allocation.

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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by randomguy » Fri Jul 12, 2019 11:58 am

teelainen wrote:
Thu Jul 11, 2019 10:38 pm


If the stock market crashes again, I am willing to bet that my high school friend will be able to withstand it a little better than someone with a 3 Fund Portfolio only (depending on the AA).
And if class C strip malls and restaurant supply warehouses crash, I am willing to bet the person in TSM withstands it better:) Holding cash in downturns is great as you can deploy at good valuations. But you can't ignore the cost of holding the cash during the years before. How big does the crash need to be for the person who has been holding cash since 2012 to be able to buy are lower prices?

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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by randomguy » Fri Jul 12, 2019 12:05 pm

22twain wrote:
Thu Jul 11, 2019 10:09 pm
whodidntante wrote:
Thu Jul 11, 2019 12:29 pm
Berkshire Hathaway owns several small businesses
Like BNSF Railway... :wink:
And Geico, Dairy Queen, Duracell, NetJets, Fruit of the loom, Benjam moore and few other small companies:) They do sort of serve as PE type company in that they tend to buy shares in special deals but a good chunk of the companies isn't investment based. It is running those various business that they own.

There are private equity and hedge fund ETFs if you want direct exposure. I don't think any have had good returns.

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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by Tyler Aspect » Fri Jul 12, 2019 12:15 pm

An ultra-wealthy investor has a different financial situation compared to a normal investor. There could be il-liquid business or assets that significantly shift their asset allocation from a typical situation.
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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by Wind_Reaver » Fri Jul 12, 2019 12:18 pm

The pictured list epitomizes the complexity/simplicity topic Rick Ferri presented awhile back.

Reducing the allocation down to 5% increments produces a portfolio similar to a more traditional 80/20, or 75/25, equity/fixed income portfolio with a large real estate tilt added. The portfolio should be easy enough to DIY with 3-5 funds*.

Code: Select all

Original Allocation:     Reduces to:              Rounded to:
26% Real Estate          52% Equities             50% Equities
25% Private Equity       26% Real Estate          25% Real Estate
22% Public Equity        21% Fixed Income/Cash    25% Fixed Income
12% Cash                  1% Miscellaneous            -or-
 9% Fixed Income                                  55% Equities
 5% Hedge Funds                                   25% Real Estate
 1% Miscellaneous                                 20% Fixed Income
1. Private Equity - If we want to get exposure to private equity, I assume there is no way accomplish this with index funds right? But is there anything else we can buy in the real world that will give us diversified exposure to private equity?
The private equity ETFs are heavy on global financial assets and returns correlated with the global market. Check out ETF symbols PSP and PEX.
2. Hedge Funds - If we want to get exposure to hedge funds, is there an index fund that tracks this sector? If not, what is the closest thing that average investors can buy in the real world that will give them exposure to hedge funds?
With a 5% allocation, how much outperformance, after fees and taxes, is required to make a significant contribution to portfolio returns? Doesn't really seem worth the added expense without an increased allocation.
3. Real Estate - If we want to get exposure to real estate, I assume we can just buy VNQ right?
Real estate/REIT funds are generally equity investments. The target portfolio image doesn't specify equity vs direct ownership.

Main point is to avoid creating complexity and increasing cost.

* The nature/purpose of several investments from the image are unclear or undefined (Local/international equity split, fixed income duration/credit quality, direct vs equity real estate, cash deposits vs cash equivalents, etc.)

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Re: Asset Allocation of the Ultra-Wealthy, can I copy their portfolio with index funds?

Post by Yohanson » Sat Jul 13, 2019 1:18 am

There are approximately 1.3 million households in the US that have a net worth of $10 million or more. Tiger 21 has about 600 members. That's all I'm going to say about that.

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