When should an investor buy aspirational assets?

This article addresses the issue of when investors should buy aspiration assets. It shows the choice of assets available to investors to build such a portfolio. It also discusses how such choices are affected by their current wealth and risk appetite.

Lifestyle portfolio framework

Aspiration assets are those that will enable investors to enhance their lifestyle- move to the next tier of the wealth structure.

Logically, an investor should first protect her basic standard of living and maintain the current standard of living before striving to move to the next tier of the wealth structure. Aspiration assets then should be rightfully bought during mid-career. Yet, it is optimal to set-up protection assets, lifestyle assets and aspiration assets at the same time. Why? Investors always aspire to move up the wealth structure; a mass-affluent investor aspires to become a HNWI while a HNWI strives to graduate to an ultra-HNWI.

The desire to move up the wealth structure is largely driven by peers. That is, when an individual from a peer group has graduated to the next tier of the wealth structure, it is very difficult for others not to aspire for the same.

Setting up aspiration assets to move up the wealth structure would be catastrophic if considered in isolation of the protection assets and lifestyle assets. Why?

Suppose an individual from a peer group moves up the wealth structure through investments in real estate. Another individual wanting to follow the investment process may be assuming higher risk because real estate may not synchronize with her existing portfolio.

It is, hence, optimal to set-up a portfolio mapped to all the spectrum of lifestyle needs. The composition of the aspiration portfolio would, of course, depend on the individual's current wealth and risk appetite.

Aspiring allocation

Aspiration assets are primarily high-risk high-return assets. A typical portfolio containing aspiration assets would effectively combine alternative asset classes and alternative strategies. Alternative asset classes range from commodities to paintings and wines. Alternative strategies refer to non-traditional exposure to the existing asset classes. This ranges from investing in private equity and hedge funds to exposure in emerging and frontier markets.

It is obvious that the spectrum of aspiration assets is not accessible to all investors. Private equity and hedge funds are available to HNWIs and ultra-HNWIs. The mass-affluent investors have to primarily settle for mutual funds and direct exposure to map their aspiration needs. Consider the alternative asset class. Mass-affluent investors can take exposure to commodities and currencies through futures contracts. Exposure to commodity is also possible through gold ETFs.

Exposure to alternative strategies can be taken via emerging market funds, Global commodity funds that invest in companies in the commodity sector, leveraged strategies, domestic sector funds and funds that carry concentrated portfolio.

Investors can also consider exposure to real estate. This refers to investing in land and building for rental income and capital appreciation. Note that buying a house for self-occupation is a lifestyle asset, not aspiration asset.

Conclusion

Aspiration assets are very risky, given the characteristics of such exposure. Containing risks in the aspiration portfolio is, hence, important.

One risk management policy would be to assign a tactical exposure range to such assets as part of asset allocation policy. A conservative mass-affluent investor could consider exposure between 5 and 10 per. At the extreme, an aggressive HNWI could consider between 30 and 40 per cent. Periodic rebalancing would be necessary to ensure that the exposure remains within the tactical range.