The Moderately Wealthy Need to Manage Money Differently From the Ultra Wealthy

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A person who has put together $5 to $10 million in liquid assets needs to manage cash differently from someone with $50 million +.

I recently renewed contact with an old buddy of mine from business school who now manages money for wealthy individuals. When we got down to discussing our career paths and my role as Editor-in-Chief of, he became insistent that holding cash in savings or money market accounts and short term CDs is a bad idea. I believe that he is dead wrong.

Of course, cash has dramatically underperformed a diversified stock portfolio and a diversified bond portfolio for the last few years. Since you cannot time the markets or the economy, nobody should ever move entirely into cash. I personally believe that an appropriate portfolio for even the most aggressive, moderately wealthy investor is 40-50% equities, 25% high grade municipal bonds or bank-issued structured notes, and 25-35% cash across accounts at top and well-known online banks.

My friend, however, suggested that instead of holding any cash, I take a look at a series of bonds, bank loans, hedge funds and managed future funds. He recommended that a moderately wealthy investor should open an account with a money management firm (such as his) and place all cash in the account, accessing a line of credit for any expenses. In particular, he proposed the following asset allocation as an alternative to FDIC insured savings accounts:

Global Bond Mutual Funds:

Templeton Global Bond Fund Adv 10.00%

Multisector Bond Mutual Funds:

Goldman Sachs Strategic Income I 10.00%

JPM Strategic Income Opportunity Select 12.50%

Osterweis Strategic Income Fund 10.00%

Bank Loan Mutual Funds:

Nuveen Symphony Floating Rate Inc 7.50%

Diversified Alternative Mutual Funds:

Avenue Credit Strategies Inst 5.00%

Driehaus Select Credit Fund 2.50%

Litman Gregory Masters Alternative Strategy 7.50%

Hedge Funds:

Morgan Stanley Absolute Return 15.00%

Directional Alternative Mutual Funds:

ASTON/River Road Long-Short I5.00%

Mainstay Marketfield Fund 5.00%

Neuberger Berman Long Short Institutional Fund 5.00%

Managed Futures:

AQR Managed Futures Strategy I 5.00%

The above portfolio, with an average annual return of 6.20% since 2009, would have slightly outperformed online savings rates over the last several years; it, however, would not have outperformed a five year CD initiated 2009 or most stock or bond portfolios.

The problem here is that the portfolio was down dramatically in 2008, and again in 2011. While it is diversified and conservative, some components have experienced negative quarters at other points in the last five years. In 2014, importantly, there is a real risk of underperformance again should interest rates rise or should emerging markets continue to falter.

Were those risks not present, ultra-wealthy investors (which I define as someone with over $50 million) would probably do well to invest a portion of their money in a series of funds like those presented by my friend. They can easily get into the proposed funds directly with the fund managers (paying only a management fee which is often reduced). They can ride out the shifts in the market. And, in the worse case, were one of the funds to fail, they would be able to absorb the loss as my friend’s model portfolio places no more than 15% in any single fund.

A moderately wealthy investor (someone with between $5 million and $10 million in liquid assets) does not have any of those luxuries. Moreover, without some sort of deep inside connections, they are likely placing their bets through a money manager who will charge a management fee. For example, a 0.70% management fee would cause the annual return on my friend’s recommended portfolio to fall to 4.60% since 2009.

A 4.60% annual return in a strong economy (versus close to 1% in the leading online savings accounts) is not only not guaranteed but it is just not enough of a premium for a moderately wealthy investor to justify the loss of liquidity, the volatility and absence of FDIC insurance. In fact, a prudent, yet aggressive, moderately wealthy investor would easily make up the 3.60% annual difference by taking on more risk in their other investment classes (something that they are more apt to feel comfortable doing if they have a cash portfolio, instead of an alternative portfolio of funds with fees on top of fees).

The fact remains: Cash – particularly in the form of savings accounts divided across several FDIC insured institutions - remains an important base to any portfolio and it is not replaceable by anything else or a collection of anything else. It is the part of your portfolio that isn’t to be risked. Having more of it allows you to sleep at night. It is liquid. It enables you to deal with life’s traumas (unexpected health care expenses due to loss of health insurance because of Obamacare, divorce, etc.) and to pursue life’s opportunities without stress (private investments, real estate opportunities, etc.).

Don’t pretend to be ultra-wealthy if you are moderately wealthy. Stick with cash.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to bank transparency and the climate crisis. Since co-founding BestCashCow in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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  • Jeff Gailor

    January 25, 2014

    Why does your return on this portfolio go from 6.20% to 4.60% because of management fees? You can probably buy most of these funds directly through a broker for a $5 commission or directly though the fund. Of course this doesn't make sense when you pay someone a management fee. Nobody in their right mind pays a money management fee.

  • HT Gentry

    January 27, 2014

    Not sure about the particular funds mentioned here, but I do not know how you can get into these conservatively managed short term bond funds without paying a management fee. Seems to be a closed world and the management fee is the price of entry. Account holders at Morgan, Merrill or Goldman get access to institutional class money market funds where the rates are about 0.20%. Online savings accounts do seem like your best and safest bet.

  • Andy Berg, CFP

    January 27, 2014

    These funds are hedge funds and hedge fund-like instruments, not cash alternatives, and would not be recommended by a qualified CFP for a moderately wealthy individual. Thanks.

  • Mary D. Franklyn

    February 03, 2014

    This is a nice problem to have! Thanks for highlighting the problems of people in the 1%.

  • Rajit Ahuja

    February 14, 2014

    Your friend gave you a solid list of funds. It seems to me that avoiding these funds because you don't want to pay a management fee is like cutting off your head to spite your face.

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