Best Investments for High Net Worth Individuals

Body Corporate Investment Advisers

With so many investment options available, working out where you should invest your money can be confusing for many people, especially as there is no single best investment option that works across the board. Also, there are a number of things that high net worth individuals should consider before they invest, which adds to the confusion.

When investing as a high net worth individual, it’s easy to be attracted by the reported headline performance and fail to consider the actual real return after costs and taxes. But, by taking a more ensemble approach to investing, you can often achieve a more suitable and sensible investment outcome.

As a high net worth individual you may also have a greater tolerance for investment volatility and risk, a longer investment time horizon and less need for highly liquid assets such as cash. You may also want consider strategies to minimise your taxes, preserve your wealth and pass it on to your next generation.

In this article, we will discuss some of the investment options available for high net worth individuals.

Where Do High Net Worth Individuals Invest Their Money?

It’s not surprising that, for many high-net worth Australians, one of the first investment options they consider is residential property. For others, it may be investing in their own business, such as being self-employed. Or even simply to invest in a high interest bank account or term deposit.  However, there are also many other investment options available which often get overlooked.

Before we start looking at these, it’s important to note that throughout history many fortunes and wealth have been created and also lost via speculating in market bubbles such as The Dutch Tulipmania (1637), The South Sea Bubble (1720), The Wall Street Crash of 1929, The Dot-com Bubble (1990-2000), Japan’s Real Estate Bubble (1991), and The US Housing Market Collapse (2007-2008). For more information on this get in touch with one of our investment advisers.

Our Recommended Investment Strategies for High Net Worth Investors

Due to the number of investment options available, we recommend that high net worth investors consider an ensemble approach by combining a number of difference investment strategies and asset classes to create a diversified portfolio.

It is also very important to consider your personal financial goals and consider when you will need to access your investment funds. This is due to all investments having an element of risk. The main risk for investors is opportunity costs (missing potential returns) and loss of capital or volatility (meaning that your investment is worth less than what you started with).

High net worth investors also need to consider their risk tolerance when investing. This means how much volatility can you handle when watching your investment portfolio reduce in value. For some investment portfolio’s it could be -5%, -15%, -25%, -35%+ or more in a 12-month period. So, if you need access to your funds in the next 12 months, investing in a portfolio which has -35% volatility would not be suitable or recommended.

Property & Infrastructure

Property and Infrastructure investments are a range of physical assets which include toll roads and bridges, energy and water infrastructure, shopping centres, offices, and industrial premises. Investors can also provide capital so a property or infrastructure projects can be built, earning interest of the funds used for the project. They main way to invest in these types of investments is via a listed structure or unlisted structure.

Benefits of Investing in Property & Infrastructure

  • Diversification of investment portfolio
  • Reliable income from longer-term lease contracts with adjustments to inflation
  • Usually, higher yields than interest earned from banks and term deposits
  • Usually, higher yields than residential property
  • Listed assets can provide liquidity  
  • May be suitable for longer-term investment periods

Potential Drawbacks of Investing in Property & Infrastructure

  • Unlisted assets can have redemption issues
  • Property by experience vacancies and tenant issues
  • Potential for capital loss
  • Maintenance, repair costs, ongoing costs, and other costs
  • Not suitable for shorter-term investment periods

Fixed Interest

Fixed interest investments, also known as government bonds or corporate bonds, are used as a financing mechanism for governments and businesses. When you buy a bond, you are lending your money to that government or business. The government or the business is then required to pay you interest for the period/term of the bond. When the bond matures, the government or business is required to pay you back the face value of the bond (assuming the business has not gone insolvent and the government does not default).  

There are many types of bonds for investors and invest in. The most common bonds include, fixed rate bonds, which pays a fixed rate of interest for the period/term of the bond. Also, floating rate bonds, which are typically linked to a moving benchmark rate and then additionally have a fixed margin applied.

There are also inflation-linked bonds, which aim to provide a hedge against movements to inflation.

Benefits of Investing in Fixed Interest

  • Diversification of investment portfolio
  • Regular Income
  • Usually, higher yields than interest earned from banks and term deposits
  • Usually, higher yields than residential property
  • Can provide stability to investment portfolios during periods of market volatility
  • May be suitable for short to medium-term investment periods

Potential Drawbacks of Investing in Fixed Interest

  • Potential for capital loss if sold prior to maturity
  • Risk of changes to interest rates
  • Risk of a company going insolvent
  • Risk of government defaulting
  • Inflation risk

Australian Equities

Australian equities, also known as Australian shares, are listed companies on the Australian Stock Exchange. When investing in Australian shares, you become part owner of the company, and as part owner, you participate in any capital growth or income distributions the company experiences. As many profitable companies in Australia pay taxes, investors can also benefit from a tax credit (known as a franking credit), which can also boost returns.  

Benefits of Investing in Australian Equities

  • Diversification of investment portfolio
  • Australian shares have been one of the best-performing asset classes over the long term
  • Investors may receive franking credits on dividends, which effectively boosts returns
  • Ability to invest in small, medium, and large listed companies

Potential Drawbacks of Investing in Australian Equities

  • Australian equities are exposed to market volatility
  • Potential for capital loss
  • The Australian share market accounts for only approximately 2% of the global market

International Equities

International equities, also known as Global shares, are listed companies on International Stock Exchanges. Like Australian shares, when investing in Global shares, you become part owner. As a part owner, you participate in any capital growth or income distributions the company experiences. However, as Australian Shares only account for 2% of Global shares, there can be greater investment opportunities by including Global shares in a diversified portfolio.

Benefits of Investing in International Equities

  • Diversification of investment portfolio
  • Global shares have been one of the best-performing asset classes over the long term.
  • Currency diversification
  • Ability to invest in small, medium, and large listed companies in specific countries

Potential Drawbacks of Investing in International Equities

  • Global equities are exposed to market volatility
  • Potential for capital loss
  • Global equities are exposed to currency volatility

Cash

Cash is simply the funds you have in a bank account, high-interest account, or term deposit. This may seem fairly simplistic, but as with all types of investment, there are benefits and drawbacks to consider.

Benefits of Investing in Cash

  • Diversification of investment portfolio
  • Cash at call accounts are immediately accessible
  • Protected by the government guarantee
  • Generally considered a safe investment and suitable for short investment timeframes

Potential Drawbacks of Investing in Cash

  • There may be a break fee if accessing a term deposit before maturity
  • Generally lower returns compared to other investment options
  • No potential for capital growth
  • Interest earned is taxable

Take the First Step to Getting the Right Financial Advice for high net worth investing

As you can see from this article, there are many investment options available for high net worth individuals and no single investment option is the best. The most important thing with investing is to construct an investment portfolio which is suitable for your financial goals, investment time horizon, and your risk tolerance.

If you are a high net worth individual and wanting to do more with your money, we can help. Getting started is very easy, simply contact our office or book a consultation with one of our financial advisers.

FAQs

What is considered high net worth in Australia?

In Australia, a high net worth is generally considered as a Net Investible Asset (NIA) of a million dollars, or a net worth of over $2.5 million, including the family home, and earning more than $250,000 a year. The Australian Taxation Office categorises ‘wealthy individuals’ as those with a net worth of over $5 million.

What do most wealthy people invest in?

Many wealthy people have invested solely into residential property. What many people have found over time is that residential property has constant outgoing costs (repairs and other expenses). This reduces the after costs and taxes return to an amount which is lower that what is currently available in a high interest account.  This is also known as being asset risk and cash poor.

Some wealthy people may have investments in an Australian shares. As discussed in the article there are many other investment opportunities which can be used to add diversification, opportunity, and reduce risk. Other wealthy people are currently investing their funds in the bank, as they do not know which investment option is suitable for them.

What alternative investments do high net worth individuals invest in?

We do come across some wealthy people who have invested directly in crypto. As per the Moneysmart website, many crypto-assets and other digital assets are not commonly considered to be financial products. Because of this, the platform where you buy and sell crypto may not be regulated by ASIC. So, you may not be protected if the platform fails or is hacked.

Also, some high net worth individuals directly invest in precious metals such as gold and silver. When investing in these alternatives, investors should also consider of the additional risks such as storage and security, illiquidity, transaction costs, and also market volatility.   

Solace Financial is the trading name of the entities that are Authorised Representatives of SFDS Pty Ltd (AFSL 509493). This website contains general advice which does not consider your particular circumstances. You should seek advice from Solace Financial who can consider if the strategies and products are right for you.

Solace Financial is the trading name of the entities that are Authorised Representatives of SFDS Pty Ltd (AFSL 509493). This website contains general advice which does not consider your particular circumstances. You should seek advice from Solace Financial who can consider if the strategies and products are right for you.