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How the wealthy are structuring their portfolios now

Successful investment portfolios have a lot in common with unforgettable novels and great-fitting bras: They've got to have structure.

But how can investors – wealthy Canadians in particular – choose an asset allocation that ensures ample funding for the future and peace of mind today? After all, with more disposable income comes the temptation to invest in every great deal and passing fad.

We asked advisors who work with high-net-worth investors to explain how the rich structure their portfolios – and whether they have moves the rest of us should copy, too.

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Nancy Grouni, certified financial planner, Objective Financial Partners Inc., Markham, Ont.

The wealthy have greater exposure to real estate and alternate investments in their portfolios – as much as a third, Ms. Grouni says.

A typical portfolio breakdown would be 25 per cent real estate – excluding their personal residences – plus 10 per cent alternative investments such as hedge funds, derivatives, foreign currency and private equity. Then a third of the portfolio consists of cash and fixed-income vehicles, and the balance is in equities.

"I find that people with a higher net worth tend to be more comfortable with those non-traditional, alternative ways of investing," she says. "They have invested in private equity through personally held corporations; that's how they earned a living."

Paul Harris, partner and portfolio manager, Avenue Investment Management, Toronto

Wealthy people see diversification differently, Mr. Harris says.

"People who are very wealthy diversify their assets, but not in the sense of, 'Oh, I'm in stocks in China, India, Japan and Europe.' The general public diversifies in the stock market by buying other areas, whereas wealthy people diversify by being in a different asset class," he says.

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"They own the debt market, even though the debt market doesn't pay them very much. It diversifies their equity risk – and I think this is where many people have got this very wrong, but wealthy people understand it. Yes, I can have a 2-per-cent rate of return and I'm not going to get more out of the bond market than that, but the money is less volatile and it's always there.

"History shows us that when the stock market falls, the bond market goes up. And vice versa. They are negatively correlated, whereas stock markets around the world are positively correlated," Mr. Harris says. "So somebody in the stock market, if they believe that the market is going to drop, they don't mind being in the bond market at 2 per cent. It allows them to make an asset-allocation change later when the stock market falls."

Susan Latremoille, wealth advisor and director of wealth management at the Latremoille Group, Richardson GMP Ltd., Toronto

Wealthy people often hold alternative investments such as real estate, private equity and hedge funds, Ms. Latremoille says. "But real estate doesn't mean they have to go buy property. They also can invest through financial markets in real estate exposure.

"They also invest in private companies, through private equity funds, funds that invest in, and/or buy, private companies. They also structure their portfolios by adding investments that protect it. For example, certain funds are used for hedging against a decline in the stock or bond market, while others are currency-hedged so that they can protect against fluctuations in the rise or fall of the dollar.

"That's the luxury the wealthy have, because they don't need the cash. They're not spending everything they make. They have the opportunity to think longer term. I always say to clients: 'It's about time in the market, not timing of the market.'"

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Tom McCullough, chairman and chief executive officer, Northwood Family Office, Toronto

Hedge funds are still common, Mr. McCullough says, but their popularity has lagged based on poor performance and high fees. "They used to be a very central piece of people's portfolios, and I would say they're now down quite a bit.

"Private equity is up quite a bit. There are a lot of people who are investing that way. In fact, I would argue, too much. There is a lot of private equity money chasing deals, and that of course pushes prices up and makes the investment return less.

"It's a really challenging time for investors, actually. I've been in the investing world for 35 years, and this is one of the more challenging times. Things seem to be expensive."

Investors are chasing higher returns, but they haven't done a good job of figuring out how much money they need, and for what.

"That's true whether you're wealthy or not wealthy. So the first step is to always determine what your goals are. That sounds like motherhood and apple pie, I know, but actually figuring out where that money is going to go, and what you need it for, is important."

Glen Brown, head of investments, Manulife Private Wealth, Toronto

Wealthy people invest like a pension plan, Mr. Brown says.

"What I mean is they don't invest in the direct stock market. So they could be in real estate or real assets like farmland or timberland. They're not generally liquid, but for high-net-worth clients, that's not as big a concern. They don't need a source of liquidity. But it gives them a more consistent, stable return and takes away some of the fluctuations that one would see in the stock market."

High-net-worth people are thinking about what they will need the money for in the longer term. "Do I want to have legacy giving? Do I want to donate to the grandkids? Do I want to buy a property in the southern States?

"They might seem like esoteric goals, but this is still something that can be replicated by the average investor.

"We have clients who have actually broken their portfolio into specific goals. One client wants to donate to their alma mater. That's a long-term goal, but it's a growth portfolio because we're anticipating that the client will be around for a while.

"But nearly all my high-net-worth clients want to preserve capital. They've taken the risks in their own businesses and built their wealth. So they generally look at investments as their money they've earned and they want to get a stable return.

"They're never swinging for the fences."

The days of double digit returns are over. Rob Carrick, personal finance columnist, lays out what you can expect given your investment risk profile. The Globe and Mail
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