After an exit, entrepreneurs suddenly find themselves with substantial capital to invest. But preserving and growing wealth over the long term is very different from building a successful business. Here are some of the most common misconceptions about wealth management.
Markus N. has built up a profitable real estate company over the past 15 years. He now wants to spend more time with his young family, and has decided to sell a majority stake in the business and keep only a minority stake. The sale agreement has been signed, and the transfer of the proceeds is imminent. He has little investment experience outside the real estate sector. However, he has some investment ideas linked to real estate.
Preserving and growing one's wealth over the long term is fundamentally different from running a business. It is worth clearing up a number of common misunderstandings and misconceptions held by investors with little experience.
Following an exit, entrepreneurs often have significant capital to invest but do not yet have an investment strategy. They tend to favour the industry they know best - where they understand the market and the key players. When building Markus N.'s portfolio, it is important to keep the correlation between his company and the new portfolio as low as possible to reduce concentration risk and achieve broad diversification.
Spreading individual investments across several asset classes, countries and sectors can help reduce risk, making it possible to pursue two otherwise competing goals in the magic triangle.
The magic triangle of investing refers to the competing goals of return, security and liquidity. Each corner of the triangle represents one of these goals. Generally, investors cannot maximise all three at the same time. Maximising one usually comes at the expense of one or both of the others. However, effective diversification can improve both security and returns, as Harry Markowitz, the founder of modern portfolio theory and later a Nobel Prize winner, demonstrated in the 1950s.
Markus's return expectations may be too high after his successful years as an entrepreneur. Annual returns of 10 % or more that he achieved with his company cannot generally be generated sustainably when investing.
Riccardo Petrachi is Head of Ultra-High-Net-Worth (UHNW) Business Europe at LGT Private Banking. He develops comprehensive wealth management solutions for ultra-high-net-worth clients and families with complex financial situations. His responsibilities include tailored investment solutions as well as advising on family governance and philanthropic engagement.
Riccardo Petrachi, Head UHNWI Europe, says: "In this case, I would show Markus N. that he achieved this return by assuming considerable risk, namely by concentrating on a few real estate investments." By simulating a downturn in the real estate sector, for example due to significant interest rate hikes, Petrachi would illustrate the scale of potential losses and compare it with a broadly diversified portfolio, which is much more resilient to downturns in individual sectors.
Clients sometimes overestimate their willingness to take risks, or assume they can tolerate more risk than their financial circumstances allow, Petrachi explains. Markus N. is convinced that he could cope well with a 20 % decline in assets. "However, when I calculate the actual amount that would be lost in the event of a 20 % decline, and the future income or return shortfall resulting from the lower asset base, clients often see the situation differently", says Petrachi.
The opposite can also be true. Some investors are unwilling to take enough risk and hold an excessively large share of their wealth in cash. Over the long term, this can mean missing out on return opportunities while inflation steadily erodes purchasing power.
Risk capacity: Objective criteria are used to assess risk capacity. Age, assets, savings rate, financial obligations and investment horizon all help determine how much investment risk a client can bear.
Risk tolerance: Risk tolerance is subjective. It describes how much risk a person is willing to take and depends on personality as well as cultural factors.
Together, risk capacity and risk tolerance determine the risk profile, which forms the basis of the investment strategy.
Once the investment objective, investment horizon and risk profile have been determined, the next step is to define the strategic asset allocation. Allocation is the term used to describe how a portfolio is divided into various asset classes such as equities, bonds, real estate, alternative investments and cash. For example, investors whose risk profile enables them to take on more risk would have a higher equity component than more conservative investors.
Allocation is based on historical risk and return data, and takes into account the correlations between the different asset classes. The overarching goal is to achieve effective diversification and thus optimise the risk-return profile.
In contrast to strategic asset allocation, which sets the long-term framework, tactical allocation focuses on the short to medium term. It is used to adjust the portfolio structure from time to time by temporarily increasing or decreasing the weighting of certain asset classes. This makes it possible to react to changing market conditions and take advantage of investment opportunities. Individual securities are selected only once the asset class weightings have been defined.
This article is an extract from LGT's forward magazine for investors. In the latest issue, we accompany clients on their way to a tailor-made investment portfolio. Developing a tailor-made portfolio can be an exciting journey, with clients often gaining fresh insights along the way. Download and read the complete magazine here.
So remaining invested can be rewarding over time. While past performance is no guarantee of future returns, historical market data of the broad Stoxx Europe 600 Total Return Index show that investors who remained invested from January 2000 to March 2026 could have more than tripled their capital (before factoring in fees, taxes or other costs). However, if they had missed the ten best-performing trading days, which are unpredictable, that growth would have fallen to less than half. Without the 20 best-performing trading days, it would have almost disappeared.
"In the case of large new amounts to be invested, for example after the sale of a company, as in Markus N.'s case, we usually invest in two to three tranches. Naturally, we also take market developments into account. If an asset class has recently undergone a significant correction, we would invest the entire amount earmarked for it", says Petrachi.
