MARKET COMMENTARY

White Paper: Choosing the Right Asset Mix: Guidance for individuals with new wealth who have access to private illiquid investments

06.17.2020

Using an FTI-constructed Monte Carlo simulation model, the paper reviews financial outcomes for different asset mixes over a 40-year investment period. While a strategy with some allocation to private investments can produce more favorable results, the allocation should be balanced with a complementary portfolio of liquid investments, as well as life insurance, in order to ensure sufficient liquidity both during lifetime and at death.

When individuals or families come into significant new wealth, they often have questions about how to invest what they have received. This is especially so in circumstances where they have not previously had substantial financial assets to manage. If the new wealth results from entrepreneurial activity (e.g., a liquidity event for a company nurtured over a period of years), the recipient may be inclined to commit some of the funds to investments in other promising private companies. At a certain level, such investments can present liquidity challenges.

To provide guidance to individuals in these circumstances, we constructed a model that enables comparisons of different investment strategies with a husband-and-wife couple who gain new wealth of $100 million. We simulate different asset mixes and evaluate the results relative to the couple’s goals. Importantly, we examine the role that life insurance can play to help manage the illiquidity associated with a meaningful commitment to private investments, including the likelihood and avoidance of a liquidity shortfall when estate taxes are due.

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