High Net Worth investors are often ahead of the markets.
Take a page from their playbook and diversify sooner than later to avoid significant losses in the equities and bond markets.
In April of this year, GlobalData published its annual “HNW Asset Allocation Trends 2019” report, a 52-page report geared towards wealth managers with projections and analyses regarding investment allocations of high net worth (“HNW”) investors and how to meet the demands of these investors.
In the report, a common theme kept appearing: that HNW investors are looking for new means to diversify their portfolios. In the words of the authors of the report,
“Overall we expect a notable increase in alternatives at the expense of fixed-income products over the coming year. Over the next 12 months we expect to see a reallocation of HNW assets as investors increasingly seek to diversify their holdings.”
The results of a survey of wealth managers concluded…
- 64.3% of wealth managers expected demand for alternative assets from HNW investors to rise
- Amid growing uncertainty, affluent investors’ desire for predictable returns will drive the demand for a consistent rental and dividend income in the form of property and equities
The report was prescient as the rest of the world scrambled on August 15 of this year to do exactly what HNW investors had already been planning since the beginning of the year – to diversify their portfolios. The general investing public was scrambling because, on August 15, the Dow dropped 800 points.
Not surprisingly, what triggered the selloff was exactly what HNW investors were trying to get away from to diversify their portfolios in the first place – fixed-income investments in the form of treasuries.
What exactly set the plunge in motion?
A phenomenon known as “inversion-yield curve,” which has been a pretty reliable predictor of recessions in the past 60 years. It was all-around lousy news in the bond market that day when the 30-year Treasury note saw its yield fall below 2.05 percent, its lowest on record. But, that wasn’t the only alarm. When the 10-year Treasury note dropped below the two-year bond’s yield – a unique situation known as an “inversion-yield curve” – that’s when investors headed for the exits.
Because this inversion phenomenon has preceded every economic decline in the U.S. for the past 60 years, making it a reliable bellwether of recession.
The HNW investors didn’t need to hear about inversion-yield curves to reallocate more of their portfolios to alternatives. Most of them began preparing at the first of the year, and most likely before, for a market correction.
A higher reallocation to alternatives doesn’t mean HNW investors are suddenly discovering them. The truth is HNW investors have always been into alternatives. It’s just that in this turbulent investing environment, their demand for alternatives is heightened.
The truth is, HNW investors are better prepared for a recession. The higher demand for alternatives among HNW investors compared to the average retail investor is due to the low correlation to Wall Street. An alternative investment, by definition, is a financial asset that does not fall into one of the traditional investment categories such as stocks and bonds, which are directly tied to Wall Street.
Common alternative investments include real estate, private equity, hedge funds, commodities, precious metals, startups, derivatives, venture capital, and cryptocurrency. Because alternatives tend to behave differently than traditional stock and bond investments, they have historically been favored by HNW investors as a hedge against recessions and inflation and for generating above-market returns.
Alternative assets are not correlated to the stock market, offer diversification and potentially higher risk-adjusted returns when compared to stocks and bonds.
HNW investors typically brush off news of economic turmoil and sit back and ride out the storm by diversifying away from Wall Street with alternative investments sooner than the average investor. The majority tend to wait too late to make adjustments in their portfolio allocation in hopes the market will rebound.
Protect yourself and follow the path of the affluent investor.
Invest early in alternative assets.
Invest for consistent, predictable income.
HNW investors are not only increasing their demand for alternative assets like commercial real estate, but most actually prefer to defer to the expertise of others by investing indirectly through a private real estate investment fund. And thanks to recent regulatory changes to securities laws, the playing field has been leveled, allowing investors at all levels to be able to take advantage of alternative investment opportunities to protect themselves from downturns just like HNW investors do.
Follow the trends of HNW investors and protect yourself from the next recession by investing in real assets and private funds that invest in real assets – especially the kind that cash flow and thrive in a downturn.