High Net Worth - Is Your Asset Allocation Acceptable?

[ut2sua]

People in these forums probably believe that blowing through millions is very difficult and because they are here and because of that it probably is difficult for them to believe. All it takes is a penchant for remodeling and redecorating frequently to make that a reality but there are other bad habits that can also burn cash like a blast furnace.

We all knew stories about half-billion lottery winners and highly paid NBA/NFL players going bankrupted within a few years of winning/retiring. It takes a lot of effort and time to build. It takes very little time and effort to destroy. These are talking points I used to educate my kids.

 

[ut2sua]

We overshot FI by quite a bit so we are comfortable with the risk of becoming less comfortable. When my wife muses about how we oversaved and could have enjoyed it more

Listening to your wife may not be a bad idea here

 

[Route246]

Listening to your wife may not be a bad idea here

One thing I should make clear is we were never deprived and never felt we couldn't afford necessities in life. We drove old cars, did not eat out expensively much and lived a typical middle class life even though we had an upper middle class income level that was being maxed out in retirement account saving, ESPP withholding and we never leveraged ourself (i.e. borrow serious amounts of money). We paid credit cards in full every month and if we couldn't afford to pay cash for something we usually waited until we saved enough to pay for it.

 

[Koolau]

In all this discussion that has attempted to define HNW status, the recent 20% run up in prices (aka inflation) seems not to have been addressed. The $1MM to $5MM definition is sort of "handy-dandy" but it hasn't been adjusted for inflation lately.

I point this out for no particular reason than that the whole concept is pretty much useless IMHO. Based on what I recall about polls taken here over the past few years, most of us on the FIRE Forums fit into the HNW status. I'm sure there are some outliers, but my WAG is that 95% of us here are in the HNW club though YMMV.

Someone touched on the real issue with HNW (especially in the 1 to 5 mil definition range.) Namely, that the 4% rule suggests that the numbers only generate $40K to $200K per year. That's somewhere in the near-poverty to solidly upper-middle class range.

Just a "for what it's worth" aside. Returning you now...

 

[Midpack]

Do you feel uncomfortably high in equities but tax consequences are preventing you from rebalancing?

Do you have any uncomfortable positions in individual stocks acquired from employment RSU, ESPP, options, etc?

I don't consider us HNW, and I'm the opposite. Our passive income is very high on treasuries & MMFs so I am tempted to up our equity allocation to reduce taxes, but we've won the game so I don't want more volatility. Fortunately tax rates are lower now than when/if TCJA is allowed to lapse. All our equity allocation is in mutual funds.

 

[Rianne]

One thing I should make clear is we were never deprived and never felt we couldn't afford necessities in life. We drove old cars, did not eat out expensively much and lived a typical middle class life even though we had an upper middle class income level that was being maxed out in retirement account saving, ESPP withholding and we never leveraged ourself (i.e. borrow serious amounts of money). We paid credit cards in full every month and if we couldn't afford to pay cash for something we usually waited until we saved enough to pay for it.

+++1 We hate debt. All through marriage, 40 years, if we couldn't afford it, we didn't buy it. This means, if high-quality milk was $3 and cheap milk was $1, we always bought the cheap milk. I completely understand the current inflation struggle, but we dealt with 9% interest rates in the early 80s with no money! We were poor with school debt. We got along just fine. Our starter home interest rate was 9+%. Someone needs to explain to society, the years from 2008-2019 were sweet very low interest rates. The lowest interest rate in history was Jan. 2021 at 2.65%.

 

[Route246]

+++1 We hate debt. All through marriage, 40 years, if we couldn't afford it, we didn't buy it. This means, if high-quality milk was $3 and cheap milk was $1, we always bought the cheap milk. I completely understand the current inflation struggle, but we dealt with 9% interest rates in the early 80s with no money! We were poor with school debt. We got along just fine. Our starter home interest rate was 9+%. Someone needs to explain to society, the years from 2008-2019 were sweet very low interest rates. The lowest interest rate in history was Jan. 2021 at 2.65%.

The only debt we had after we married was the mortgage. We always had an equity line of credit for emergencies but never tapped it. We have never paid a penny of usurious credit card interest, either. My parents were the same, only debt ever in our family growing up was the mortgage. Regarding the mortgage we kept refinancing as interest rates plummeted, finally settling in on a 15-year which we paid off in 12 years. Those 12 years were very modest in terms of our spending but we were mortgage-free at a relatively young age. Like you, we got along just fine, it was just a modest life at the time, in spite of my salary which was pretty decent but my wife was a stay-at-home mom (our choice) so we sacrificed financially for this, too.

I think if people knew today how much we have they would be shocked because our facade is still a little modest for our income and savings level. We do have new cars (less than 4 years old is new for us), very nice landscaping and nice remodeling but our house is still modest and our neighborhood is only slightly above average, certainly way less than "we could afford" at this point in our lives.

 

[thefist]

A high equity allocation may be MORE tax efficient.
It all depends upon how much is sold.

 

[ut2sua]

I completely understand the current inflation struggle, but we dealt with 9% interest rates in the early 80s with no money! We were poor with school debt. We got along just fine. Our starter home interest rate was 9+%. Someone needs to explain to society, the years from 2008-2019 were sweet very low interest rates. The lowest interest rate in history was Jan. 2021 at 2.65%.

Bolded above is so true. We were so happy that we were able to get a 7% mortgage rate for our first home. That was around 1993. Before that mortgage rate was 9->10%. Inflation has always been part of the game with 2% being a quick dip in the history chart.
Unfortunately, all of the above did not help folks with tighter budget where basic necessities have been most inflated (50% or more on food items, rental etc.). For these folks, inflation feels like 50%, not the 3->4% talked about in the news. For folks with fixed mortgage locked in who also owned stock and other higher fixed income, the inflation effect was not felt as much. I do feel for younger folks who are in their earlier stage of building NW as well as the pay check to pay check population (which is a large % of the population in the US)

 

[Andre1969]

In all this discussion that has attempted to define HNW status, the recent 20% run up in prices (aka inflation) seems not to have been addressed. The $1MM to $5MM definition is sort of "handy-dandy" but it hasn't been adjusted for inflation lately.

Someone touched on the real issue with HNW (especially in the 1 to 5 mil definition range.) Namely, that the 4% rule suggests that the numbers only generate $40K to $200K per year. That's somewhere in the near-poverty to solidly upper-middle class range.

$200K seems like a lot to me, but it's also nothing I've ever experienced. I'm sure once I was there, I'd find a way to get comfortable with it. FWIW, my Mom and stepdad topped out around $200K combined when they retired. But that was way back in 2011, and inflation-adjusted, would be around $279K today.

And they didn't live what I'd call an overly extravagant lifestyle. Modest 3br/2ba rancher in southern Maryland that they paid $120K for way back in 1989. They did buy a second home in Florida, back around 2003 or so, with aspirations of retiring there. But it was around $180K. I guess some people might think having two homes is extravagant. They'd go on vacations from time to time, but in more recent years it was just to go to the place in Florida, to either get away from it all. Or, they'd go one at a time, to get away from each other!

 

[brett]

Our FA earned his keep on more than one occasion. I was holding on to stock options that had a low exercise price in anticipation of higher stock prices.

My spouse felt that I should cut and run. Take the gain and ride into the sunset.

We decided to speak with our FA. Long story short he came back to me with an analysis that indicated sell. Stock was at 44-46. Options at 15-23. All the wags said the stock was going to 60-70 in nine-twelve months. I am as greedy as the next guy.

FA's recommendation was to sell at that time and realize the gain. I decided to follow his (and my spouse's gut feel) advice and gradually sell over a very short period. Nine months later the stock was at $15. It went to $45 briefly and then did a swan song. I dodged a six figure opportunity loss by following his advice and DW's conservative gut feel.

 

[Car-Guy]

^^^^^
Sounds to me like your DW's advice might be as good as your FA and her advice is free.

 

[Koolau]

^^^^^
Sounds to me like your DW's advice might be as good as your FA and her advice is free.

And there's always the Ouija board.

 

[Sunrise_Ray]

This says "Ultra High Net Worth" starts at $30 mm: Ultra-High-Net-Worth Individual (UHNWI): Definition and Criteria

Of course, these are more or less made-up terms, so different people can define them differently.

Great article you found and posted. Yes, UHNW is $30M+ but the HNWI is High-Net-Worth Individual (HNWI): Criteria and Example and it is smaller and more achievable!

AA is critical as we approach 50, 60 and 65. It is important to know where the assets are, and if they are all in the same place / location / easily-discoverable / easily-manageable. As I say this, I am no where there, and no management of the assets with a good AA. That is what I am going to achieve in 12 months, and hopefully by 12/31/2024.

Thanks for some great posts and superb discussion points, and the openness.

Ken

 

[Route246]

Our FA earned his keep on more than one occasion. I was holding on to stock options that had a low exercise price in anticipation of higher stock prices.

My spouse felt that I should cut and run. Take the gain and ride into the sunset.

We decided to speak with our FA. Long story short he came back to me with an analysis that indicated sell. Stock was at 44-46. Options at 15-23. All the wags said the stock was going to 60-70 in nine-twelve months. I am as greedy as the next guy.

FA's recommendation was to sell at that time and realize the gain. I decided to follow his (and my spouse's gut feel) advice and gradually sell over a very short period. Nine months later the stock was at $15. It went to $45 briefly and then did a swan song. I dodged a six figure opportunity loss by following his advice and DW's conservative gut feel.

Curious about this assessment. Did he explain something in his analysis of the stock that was an exceptional data point in order to recommend exiting the option position? That is, did he truly add value and his recommendation went against fundamentals or was he lucky?

I buy and hold low cost index funds. I've been doing this for more than 30 years. My advice came from Bob Brinker and is similar to John Bogle's method. Obviously, this approach has done very well but it is still theory (good theory) and subject to change. I jokingly tell my wife the reason we are here is because of Bob Brinker but that's also because I'm a fanboy of his. The value of his (and Bogle's) advice has more to do with focusing on low expenses as much or more than choosing index funds.

I guess my point is, what if the FA was wrong and your stock shot to 100? Would you still have this opinion of him? If so, then you have made a good choice of FA.

 

[Koolau]

Curious about this assessment. Did he explain something in his analysis of the stock that was an exceptional data point in order to recommend exiting the option position? That is, did he truly add value and his recommendation went against fundamentals or was he lucky?

I buy and hold low cost index funds. I've been doing this for more than 30 years. My advice came from Bob Brinker and is similar to John Bogle's method. Obviously, this approach has done very well but it is still theory (good theory) and subject to change. I jokingly tell my wife the reason we are here is because of Bob Brinker but that's also because I'm a fanboy of his. The value of his (and Bogle's) advice has more to do with focusing on low expenses as much or more than choosing index funds.

I guess my point is, what if the FA was wrong and your stock shot to 100? Would you still have this opinion of him? If so, then you have made a good choice of FA.

Yeah, sounds like a coin flip which anyone can do for him/her self for free (well, it'll cost a quarter.)

 

[Markola]

Our WR is 1.5%. The preferred AA is 80/20, we are comfortable with it.

Just noting, you’re spending probably the equivalent of just the combined dividend yield of the S&P 500 Index Fund and Total Bond Fund yield. Which is to say, your income is probably growing nicely year after year.