How HNW Investors Are Staying Focused In a Volatile Market
by Taylor Morrison
Let’s face it: The U.S. stock market has become volatile. Some may remember when the Dow (Dow Jones Industrial Average) fell by nearly 7% in a single day. It’s almost commonplace to see the index slide more than 1% in a single day. Meanwhile, headlines of trade-related tensions between China and the U.S., and strained relations between Iran and Saudi Arabia (and their effects on the oil market) Stoke concerns of future volatility.
Volatility like this can be unsettling for those who are new to investing. Even experienced investors have not seen this kind of market activity in some time. It can be unsettling. Much like inflation – many new investors have not experienced a bear market either and might not understand that it is a normal part of the economic cycle. Thankfully, as an investor, there are things you can do to stay focused on your goals, regardless.
This topic answers the following questions:
Can HNW investors find peace of mind during inflation?
What are alternative investments?
How does commercial real estate fare against volatility?
Why is diversity a good thing for your investment portfolio?
What are the advantages of private equity and venture capital?
The Mercurial Global Market
Along with everyone else, financially independent investors have faced challenges in the global market lately. Although we cannot predict how long the trend will continue, it is important to remember that even the affluent are not immune to its effects.
We must remain focused on our financial goals, even when financial news coverage of instability at home or abroad makes us feel anxious or discouraged. Thankfully, there are silver linings with the potential to make doing so easier. In fact, savvy investors have multiple means of potentially sidestepping economic upheavals.
Alternative investments may be one solution to consider when traditional assets lose their viability High-net-worth (HNW) investors should consult with their financial planner to see if this asset class makes sense for them While these investments aren’t suitable for everyone, they can add an element of stability to your portfolio.
Additionally, they can help diversify your portfolio in a world where traditional assets are struggling (or failing) to keep pace with inflation. One of the greatest benefits of adding an alternative investment to your portfolio is the fact they are rarely correlated to traditional market performance. By deliberately obtaining an array of different investments, you add diversification, which should bring about stability in times of uncertainty.
While concentrated holdings can be lucrative in less volatile times, they can become liabilities when markets bounce around. Add a spike in inflation (like we’ve seen in 2022), and you could find yourself wishing you have a more balanced portfolio. A long position that may normally profit investors can lose value amid the resulting rising interest rates. Diversification is an investing strategy designed to evade—or at least lessen—volatility’s impact by limiting your exposure to any one type of asset’s losses.
It may help to think of a cargo ship’s bulkheads, which keep the vessel afloat: if an area takes on too much water, they close, separating the damaged or flooded section from the rest of the ship. Similarly, when one type of asset (e.g., a stock) begins losing value, diversification limits its potential damage to your portfolio.
As a matter of fact, if other assets of a completely different type are gaining value at the same time, your losses elsewhere may be offset to bring about an overall better investment return. A properly allocated portfolio, flush with diversification can help you manage risk and continue en route to your financial goals
In our opinion, alternative investments can do just that! The increased diversification, uncorrelated returns, and stable income Are all factors that help HNW investors sleep better at night.
Tactical Investing Can Still Generate Stable Returns Amid Market Volatility. We Know How.
Commercial Real Estate
For instance, commercial real estate (CRE) and commodities can be used as alternatives to traditional assets like stocks or bonds for reducing your risk exposure while maintaining an acceptable level of return potential. In fact, many HNW investors use these types of products instead of cash savings accounts, since they offer better returns with minimal market fluctuation risk associated with them.
As inflation rages, alternative investments like commercial real estate can provide surprising stability. Stock values are subject to the ebbs and flows of global markets, but since real estate’s worth is inherently tied to local property values, its value tends to stay more constant.
It remains an asset class offering both diversity and liquidity. At the same time, it continues to have historically low correlations with other investments such as stocks or bonds (and even cryptocurrencies), as well. In addition to being less susceptible to market volatility, commercial properties can also offer tax advantages. These may help offset losses incurred during periods of low returns or negative growth.
Private Equity & Venture Capital
Another way to diversify your portfolio is through private equity and venture capital (PE/VC). These investments can be made either directly or through a mutual fund, which allows you to invest in companies that are not traded publicly. PE/VC investments also tend to produce uncorrelated returns with other asset classes.
Some investors may tout this fact as beneficial for avoiding market-timing mistakes. However, since we do not recommend attempting to time the market in the first place, we believe it is best considered as one benefit among many, overall.
Investing in PE/VC funds also allows an investor to own a stake in the underlying assets of several different companies—without having to spend time researching each individual investment opportunity.
Master Limited Partnerships
Master limited partnerships (MLPs) are a unique investment vehicle providing investors with a way to participate in the energy industry without the full range of risks that are often associated with oil and gas exploration and development. Because MLPs pay out most of their income as dividends, they do not have the same level of volatility as other types of energy stocks.
In fact, recent market turbulence has proven beneficial for many MLPs: they have been able to raise more money than ever before while retaining their tax advantages. In essence, a master limited partnership is a publicly-traded, limited liability company that must operate in an industry related to crude oil and natural gas production, processing, or transportation.
This includes pipelines and storage facilities, such as storage tanks. An MLP is set up as a pass-through entity: any tax benefits derived from operating profits normally flow through directly onto shareholder returns as well.
Managed Futures & Structured Notes
Managed futures can also be used as a hedge against market declines or as an investment to participate in rising markets. They can help diversify your portfolio to reduce risk and volatility while still enjoying their potential gains.
Additionally, structured notes are another type of investment that can help protect an investor's principal. However, these assets are not risk-free, so they should not be thought of as a substitute for traditional investments, altogether. They can be complex, which makes them difficult to understand; investors considering them should carefully consider all their options before making any decisions. We believe a fiduciary financial advisor is vital for doing so.
The best way to stay focused during volatile times is by having a solid financial plan in place. If you do not have one yet, it is never too late to start—and TrustCore Financial Services, LLC is here to help. As fiduciary advisors, we are legally required to put our client's interests ahead of our own.
Contact us to schedule your complimentary appointment today. We have years of experience providing a full spectrum of wealth management services for high-net-worth individuals, including retirement planning, alternative assets, and more. Some of our clients might say we remain the best financial advisor Brentwood, TN, has to offer.
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