Ultra-High Net Worth Portfolio Protection Strategies

The headlines scream out like something from the front page of a supermarket tabloid: “Stock Prices Sink in a Rising Ocean of Oil”, “Dow Tumbles 391 Points Amid Global Rout”, “Fears Rise that Plunging U.S. Stocks Could Pose Risk to Economy if Volatility Continues”, and so on.

However, these chilling warnings are not found in the National Enquirer or Star — next to tales about the latest Big Foot and Elvis sightings. Rather, they are pulled directly from recent editions of the New York Times, the Wall Street Journal, and the Los Angeles Times, respectively.

Table of Contents
Why Asset Allocation is King Asset Allocation is Not Diversification Asset Allocation Strategy #1: Relationship-Based Asset Allocation Strategy #2: Risk-Based Common Fundamentals Portfolio Must Match Asset Allocation Looking Ahead

In other words: the massive global market volatility that has ushered in 2016 is not hype or hot air. It is starkly real, and as the headlines urge, we might see even more ups and downs in the months ahead.

Whether we ultimately call this a “Correction” or a “Bear Market” is beside the point. For many Ultra-High Net Worth Investors — i.e. those with a net worth exceeding $25 million — the road ahead will likely be a scary and bumpy one.

In our newly published book “The Art Of Protecting Ultra-High Net Worth Portfolios And Estates, Strategies For Families Worth $25 Million to $500 Million” available from Amazon.com at https://www.amazon.com/Protecting-Ultra-High-Worth-Portfolios-Estates/dp/1599326558 , we share with our readers strategies we implement for our clients to help with precisely such horrible markets.

Ultra-high net worth investors deserve the best, so that the journey throughout 2016 and beyond will not cause so many worrisome days and sleepless nights.

To do the topic justice, we highly recommend a full read of the multitude of strategies in our book. Meanwhile, in this short blog we would like to share one protection idea against the horrible times of a volatile marketplace: asset allocation.

Why Asset Allocation is King

Let’s start with this: nobody has a crystal ball, and any self-proclaimed financial or investment advisor who claims otherwise should be avoided. Such advisors/managers/firms are, in our humble opinion, the equivalent of a financial time bomb, and you do not want to be anywhere nearby when (not if) they blow up – because they will take your assets down with them.

It is precisely because the future is unknown, that asset allocation remains such a smart, proven and, frankly, essential structuring strategy so that portfolios perform in a certain fashion — regardless of what the headlines scream.

Asset Allocation is Not Diversification

Before highlighting two tried, tested and yet rather different asset allocation strategies, it is necessary to point out that asset allocation and diversification are not synonymous. Diversification involves striving for a variety of investments within a particular asset class with in a portfolio.

However, asset allocation focuses on strategically determining the optimal investment percentage of a portfolio into different asset classes. In this light, it is clear that asset allocation is much more robust and sophisticated, and requires valuable insight.

Asset Allocation Strategy #1: Relationship-Based

The first asset allocation strategy that ultra-high net worth investors can utilize is a “relationship-based” approach. This involves analyzing historical corelationships between different asset classes, with the belief that such corelationships are not mere coincidences, but will hold (somewhat) true going forward. The objective of this asset allocation strategy is to maximize return and minimize risk.

Asset Allocation Strategy #2: Risk-Based

The second asset allocation strategy focuses on spreading risk out among various asset classes which behave in certain ways during different economic environments — such as during inflation, deflation, booms and recessions. The objective is to establish a portfolio that performs predictably, come what may.

Common Fundamentals

Clearly, these are two distinctly different asset allocation strategies: one is based on historical corelationships, while the other is based on asset classes’ behaviours during different economic environments. Yet despite the differences, both strategies are long-term approaches, and as such neither suffer from a foolish and reckless attempt to “time the market” by betting on future market direction. As noted above, no one has a crystal ball – yet many are willing to make bets, sometimes big ones, with your hard earned wealth.

Portfolio Must Match Asset Allocation

Ultra-High Net Worth investors normally have three or more advisors. It is therefore critical you have an Investment Policy Statement (see requirements and steps to develop this in our book) for all to follow. You must ensure that your different portfolios match your desired overall portfolio mix and align with your selected asset allocation strategy.

Frankly, many investors we meet don’t have an overall unifying investment strategy! Their different advisors, over a period of years, start working in different directions and go of course, potentially straying from your expectations and appetite for risk! We often meet Ultra-High Net Worth Investors who experience this.

As this critical task is time consuming and complex, entailing accounting for all your advisors’ portfolios into one pie, it is best to delegate it to a primary advisor. This way, you will not be vulnerable to unwelcome, potentially terrifying surprises on the heels of market volatility when – not if – it occurs.

Looking Ahead

Indeed, while nobody knows exactly what the future holds, and while asset allocation cannot guarantee you won’t lose, this much is abundantly clear and unarguably certain: volatility is embedded into the structure of integrated global markets. Individuals and families with ultra-high net worth portfolios who implement the asset protection and other strategies noted in our book, will likely find that the fire drill after a market melt-down for others, may be more of a tweak here and there for them.

Authors Haitham “Hutch” Ashoo and Christopher Snyder are partners at Pillar Wealth Management, LLC. Wealth Management in Walnut Creek. Ashoo is founder, president and CEO. Reach them at [email protected] or 925-356-6780.