A group of friends discussed whether the rules of investing differ for the rich. Should they do anything differently? As with most things, the answer is not a simple yes or no.
The definition of who is rich and who is not is arbitrary. For example, the mutual fund association in India defines a high net-worth individual as one who invests Rs. two lakhs and above. They probably mean Rs. two lakhs and above in one shot (anytime they invest).
This article defines the rich as someone with a liquid net worth at least three times more than the total corpus required for all their short-term and long-term goals. Naturally, this is also an arbitrary definition but much more exclusive than the mutual fund industries definition.
So, how does one invest when there is a lot of money to play with or when the normal rules and restrictions of goal-based investments no longer apply?
Asset allocation rules may no longer apply, but they should still be reasonable. For example, a person can afford to hold 80% equity when the 20% debt has enough money to fund retirement.
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Diversification across asset classes and within asset classes is just as important and perhaps even more so. If someone with that much net worth asked, “Should I include gold, real estate, or REITs in the portfolio?” I would say, but tread carefully (esp with real estate). I would never say yes to the normal Joe.
The same goes for sectoral funds or PMS products, as long as their weights in the portfolio are small. Sadly, this is rarely the case, though. The biggest enemy of the rich guys is concentration risk. Too much investment in a single asset class or a single product. They can be much more adventurous than the common salaried guy if they can avoid this.
Even if a rich person wants to keep it simple and avoid complex products, she can’t simply hold one or two mutual funds! That would be a mistake. If your equity holding is 10 crores, would you put it all in just two funds? Or would you rather hold 5-10 ten funds? There can be concentration risk even among the “simpler” products. A di-worsified portfolio is less evil at high net worth than a concentrated portfolio.
At higher net worth levels, the risk one can/should take and the risk one wishes to take are usually both high. And unlike the normal Joe, they need not match! However, the portfolio should remain grounded in asset allocation and diversification fundamentals. The biggest enemy of the rich guy is concentration risk. They would have usually gotten rich by one means (e.g. stock options) and kept most of their wealth there. If they can progressively reduce this and build a portfolio that balances security and risk, they can afford to experiment while securing their family’s future for several decades.