On today’s episode of The Impatient Investor Andrew talks about high net-worth investors often being ahead of the markets. He explains why he thinks you should learn from them and their playbook and diversify sooner than later, to avoid significant losses in the equities and bond markets.
“The truth is high net worth investors have always been into alternatives. It’s just that in the turbulent investing environment, their demand for alternatives is heightened.”
FULL TRANSCRIPTION:
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.
Recently, global data publish its annual high net worth asset allocation trends, 2019 report. It’s a 52 page report geared towards wealth managers and projections and analysis regarding investment allocations of high net worth investors and how to meet the demands of these investors.
In the report, a common theme kept appearing that high net worth 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 high net worth 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 high net worth investors to rise amidst growing uncertainty, affluent investors desire for predictable returns will drive the demand for a consistent rental and dividend income in the form of property inequities. The report was pressuring as the rest of the world scrambled to do exactly what high net worth investors had already been planning since the beginning of the year and that’s to diversify their portfolios. The general investing public was scrambling because on August 15th of last year, the Dow dropped 800 points. Not surprisingly what triggered the selloff was exactly what high net worth investors were trying to get away from to diversify their portfolios in the first place, fixed income investments in the form of treasuries.
So what exactly set this plunge in motion? A phenomenon known as inversion yield curve, which had 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%, its lowest on record, but that wasn’t the only alarm. When the 10 year Treasury note dropped below the two year bonds yield a unique situation known as an inversion yield curve happened. And that’s when investors headed for the exits. Why? Because this inversion phenomenon has proceeded every economic decline in the US for the past 60 years, making that a reliable bellwether of recession. The high net worth investors didn’t need to hear about the inversion yield curve to reallocate more of their portfolios to alternatives. Most of them began preparing at the first of the year. And most likely before that in preparation for a market correction.
A higher reallocation to alternatives doesn’t mean high net worth investors are suddenly discovering them. The truth is high net worth investors have always been into alternatives. It’s just that in the turbulent investing environment, their demand for alternatives is heightened. The truth is high net worth investors are better prepared for a recession. The higher demand for alternatives among high net worth investors compared to the average retail investor is due to the low correlation to Wall Street. In 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 crypto currency. Because alternatives tend to behave differently than traditional stock and bond investments, they have historically been favored by high net worth investors as a hedge against recessions and inflation 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.
High net worth investors typically brush off news, economic turmoil in 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 allocations 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. High net worth 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 high net worth investors do. Follow the trend of high net worth investors and protect yourself from the next recession, by investing in real assets and private funds that invest in real estate assets, especially the kind that cashflow in thrive in a downturn.
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