Piggy bank with Canadian coins.Getty Images/iStockphoto
Whether you worked hard for it, inherited it or won it in a lottery, obtaining high-net-worth (HNW) status often means a change in investment style. Instead of wealth creation — been there, done that — these investors are focused more on hanging on to what they have.
"The key is wealth preservation, not eroding your capital," said John Budd, a partner at Toronto-based Cumberland Private Wealth Management Inc.
For most HNW investors, that means not trying to beat the market, necessarily, but instead investing in less risky plays over a longer period.
HNW investors also usually have a wider range of investments both in the markets and outside of them, in areas such as real estate and private companies. They also put a lot of effort into reducing taxes paid on their investment income.
HNW investors forced to take on more risk
Preserving wealth has been more difficult for those in the HNW club in recent years, thanks to low-interest rates. That has left many with little choice but to increase their investment risk and accept market volatility.
"The really important concept almost everyone needs to get their head around is that you don't get outsized returns without accepting volatility. They go hand-in-hand," said Andrea Horan, a portfolio manager at Toronto-based Agilith Capital Inc.
"In the current environment of ultra-low interest rates, you don't even get to preserve capital without accepting some level of volatility."
The question for HNW investors, similar to any investor, is how much risk they're willing to stomach to stay ahead.
When assessing risk tolerance, Ms. Horan's firm often asks its clients how they would feel if their portfolio dropped 8 per cent, but the market was down 12 per cent over the same period. Or, on the flip side, how would they react if the market was up 20 per cent, but their portfolio was up just 6 per cent.
"It's the fear of missing out on one side," Ms. Horan said, balanced with the ability to sleep at night.
Wealth doesn't determine risk
Having more wealth doesn't mean a greater tolerance for risk, Ms. Horan said.
"Approaches to investments aren't always dictated by your bank account, savings or balance sheet. It is by what your own personal understanding is," she said. "It really is a personal thing, not a wealth thing."
Age and years until retirement also don't determine risk tolerance either. Ms. Horan said her firm has clients in their forties who are as risk averse as others well into their retirement years.
But how a person became wealthy can sometimes determine their stamina for risk. For instance, someone who earned their wealth through investing or by selling a business might have a greater stomach for market ups and down than someone who inherited it, Ms. Horan said.
"People who've earned it feel they know how to make money, and could make it back," if necessary, she said, whereas someone who inherited may view it as a gift that can't be lost.
More opportunity for diversification
HNW investors have a better ability diversify their assets, which also helps to "dampen the volatility" and protect wealth, said Mr. Budd.
"Someone who is really trying to get rich by playing the market is likely to have very few holdings," he says, as compared to a HNW investor who might hold 20-to-30 stocks to balance out their portfolio.
"Typically, high-net-worth investors are better positioned to ride out a market downturn … and it's not going to affect their lifestyle," Mr. Budd said.
However, many HNW investors do hold some riskier, alternative investments outside of their main portfolio, or what Mr. Budd described as "play money." That can include private startup companies or riskier bets in hot sectors or on high-flying stocks.
'Conservative and responsible' key attributes of HNW
Still, the overall goal for most HNW investors is to be "conservative and responsible," with their money, said Tony Bennett, president and chief executive officer of BMO Private Investment Counsel Inc.
Their goals usually include investing in the most tax-efficient way possible, as well as wealth transfer that can include setting aside funds in trusts or for charitable causes.
"Wealth preservation doesn't mean that assets don't at some point go negative – it just means that, in the long run, they'll grow at a faster rate than inflation and taxes," Mr. Bennett said.
And while beating the market may not be their primary goal, many HNW investors want to stay on top of investing trends. Many also want to know how people with similar levels of wealth are investing their money.
"High-net-worth investors want to ensure they're taking advantage of the marketplace just like anybody else would in their situation," Mr. Bennett said.