The great thing about high-net-worth investing is that you can invest in exotic and exciting things. All asset classes are open to you. However, sometimes simple strategies are neglected in favour of those seen as more thrilling. One strategy, I feel is often overlooked by high-net-worth investors is indexing. Indexing is when you purchase an investment which mirrors the composition and performance of a specific market index, like the ASX200 or the NASDAQ or S&P 500. Indexing does have an image problem amongst high-net-worth investors. It is seen as boring and basic, which is why I think it can have a valuable role in your portfolio.
It is true indexing is a simple strategy, with one purchase you have exposure to all the stocks in a particular index and there is nothing else to do. You will simply get the performance of that index minus the management cost, which is usually very low, some as low as 0.04% p.a. We all know markets go up more than they go down, so this is a straightforward way to gain market exposure at a low cost.
The other advantage for high-net-worth investors is that not only are index funds low-cost, but they are highly liquid. This means if you have a portfolio that is dominated by illiquid assets such as private equity and alternatives, it can be a good way to gain market exposure with the bonus of being able to sell quickly and easily.
I am certainly not suggesting that you should index your entire portfolio. The downside of indexing is that you can never do better than the market. But this is why you have an active component to your portfolio as well. I am very much a fan of active investment managers and alternative assets classes. I believe they can add significant value to your portfolio when well-selected and researched. However, I don’t think you should see yourself in one camp or the other, but when you have significant wealth, you should ask yourself “Why not both?”.
Kind regards,
Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently
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