When it comes to building and maintaining long-term wealth, one critical question every family must address is: what will make the biggest impact on your financial future? For wealthy families, the stakes are high and the complexity of investment decisions is significant. The key to achieving success is to determine the right balance between growth and risk in your investment strategy.
In this article, we explore how wealthy families can approach this challenge by working with a trusted advisory team to assess their unique financial situation, investment goals, and risk tolerance.
Understanding growth and risk
Before you can determine what will make the biggest impact on your financial future, it is imperative to understand the key dynamics of growth and risk in the context of investing.
Growth refers to the potential for an investment to increase in value over time. This can come from capital appreciation (the increase in the value of an asset) or income generation (such as dividends or interest earned, or rental income). Growth assets, such as stocks, typically offer higher returns over the longer-term, but also carry more price volatility and risks along the way.
Risk, on the other hand, is the uncertainty regarding the financial outcome of an investment. Risks come in many forms: market risk, credit risk, interest rate risk, geopolitical risk, and others. Riskier assets may offer greater potential returns, but also have the potential for greater losses.
To learn more about investment risks, see A guide to types of investment risk.
The importance of diversification
Of all your investment decisions, the right balance of investment growth and risk will make the biggest impact on your financial future. One of the most effective ways to balance growth and risk is through diversification, or the spreading of investments across various asset classes. A well-diversified portfolio can:
• Reduce volatility by spreading risk across different investments.
• Enhance consistency of your investment returns by smoothing out the ups and downs of individual investments, helping you achieve more consistent long-term returns.
• Access diverse growth opportunities as different assets have different growth drivers. Stocks may benefit from technological advances or economic recovery, while real estate or commodities may capitalize on demographic trends or inflation. By diversifying, you can access a range of growth opportunities.
For wealthy families, the idea is to own a variety of assets in a way that aligns with both short-term cash flow needs and long-term investment growth. If you want to learn more about how wealthy families should approach financial planning in a comprehensive way, read our recent article on The Ultimate Guide to High Net Worth Financial Planning.
Diversifying Across Asset Classes
Investment portfolios are typically diversified across multiple asset classes:
Traditional asset classes are the foundation of most investment portfolios. These include publicly traded equities (or stocks) and fixed income (or bonds) as well as cash equivalents, which provide portfolio liquidity.
Diversification within stock or bond portfolios can mean that your securities come from different industry sectors like technology, healthcare, or energy. Securities in different sectors offer different benefits like more potential for growth or higher dividends. By diversifying among sectors and companies, you can reduce the impact of any single underperforming asset or industry sector on your overall portfolio.
Alternative asset classes can further diversify financial investments and may provide potentially higher returns with different risk profiles than equities and fixed income. Common types of alternative investments include:
• Private equity: Investing in private companies, which may have the potential for high growth but also come with higher risk and less liquidity.
• Private credit: Provides the opportunity to invest in fixed income securities that are not issued or traded on the public markets.
• Hedge funds: Hedge funds use a range of investment strategies, including short selling, leverage, and derivatives, to generate returns. They are typically riskier but can offer high returns.
• Commodities and natural resources: Investments in precious metals, oil, and other natural resources can hedge against inflation and provide diversification.
While alternative investments can be more illiquid, complex and require high minimum investment, their returns may be uncorrelated with traditional assets classes and can serve to smooth portfolio performance and enhance returns over the long term. To learn more about alternative investments, read Types of Alternative Investments.
Managing risk through strategic asset allocation
Asset allocation is the process of determining how to distribute your investments across various asset classes over time. It is crucial to balancing growth and risk in your investments, which is what will make the biggest impact on your financial future. A trusted advisor can help you determine the right asset allocation based on your time horizon, risk tolerance, and financial goals.
• Time Horizon: If your wealth is intended for long-term growth (such as passing on to future generations), you may be able to take on more risk by investing in higher-growth assets like equities. On the other hand, if you need to access liquidity in the short term, you may want to favor more conservative investments, such as bonds or cash equivalents.
• Risk Tolerance: Each individual and family has a different comfort level when it comes to risk. Some may be comfortable with significant fluctuations in portfolio value, while others may prefer more stability. A trusted advisor can help you understand your risk tolerance—and regularly reassess it as part of the financial planning process —to help determine an appropriate allocation strategy.
• Income Needs vs. Capital Appreciation: Another consideration in asset allocation is whether the family needs current income from their investments (e.g., dividends or interest payments) or whether they are focused on long-term capital appreciation. For example, high-net-worth families who are looking for income may invest more in dividend-paying stocks, bonds, or real estate. Those focused on long-term wealth accumulation may allocate more to growth-oriented investments like publicly traded stocks or private equity.
• Tax considerations: Tax-efficient portfolios allocate assets with a focus on generating the highest after-tax investment returns. This is crucial for wealthy families in higher tax brackets.
Protecting wealth for future generations
Creating the right investment portfolio is not just about building wealth—it is also about protecting it and ensuring family wealth is transferred tax-efficiently and effectively to future generations. As part of the estate planning journey, a trusted advisory team will get to know you, your financial goals, and what a legacy means to you. Then, they will develop a guide for implementing it, and help you prioritize your next steps. With your estate plan in place, you can feel confident that your wealth will be transferred smoothly, which helps prevent family conflicts. It also provides you with financial control, flexibility, and peace of mind.
To learn more, read our recent article on How to prepare for the great generational wealth transfer.
How Hancock Whitney Wealth Management can help
What will make the biggest impact on your financial future? For wealthy families, achieving long-term financial success means balancing growth potential with appropriate levels of risk with their investment portfolios. By diversifying investments, employing strategic asset allocation, and undertaking a thoughtful estate planning process, wealthy families can feel secure in their financial futures.
For over 125 years, we’ve been building lasting relationships with our clients. That approach is rooted in a commitment to responsive service, personal attention, and taking the time to truly understand your goals. Contact an advisor today.
The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.
This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.
Hancock Whitney Bank offers investment products, which may include asset management accounts, as part of its Wealth Management Services. Hancock Whitney Bank is a wholly owned subsidiary of Hancock Whitney Corporation.
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