Financial Survival for Ultra High Net Worth Investor in Down Markets

Financial, mental survival in down markets

Things to consider for financial survival

1. Overcome destructive investor behavior.
2. Focus on life goals and rebalancing.
3. Plan ahead for turbulent markets.

The recent stock market volatility is not uncommon. Many similar, or even worse, environments have transpired in the past. In fact, such occurrences will almost certainly repeat themselves in the future; therefore you should plan for them.

While market volatility may make you question your investment strategy, it’s essential to consider the long-term implications of your strategy. 

Behavioral science suggests that investors experience more extreme negative emotions when they lose money vs. positive emotions when they make money. Volatility can cause you and your advisers to follow a path of destructive investor behavior.

Having the right financial planning tools can help you visualize the possible impact of various investment strategies over a given period. 

Process and solutions

In the interest of providing context to our financial survival process and solutions, it is important for you to know our firm’s core investment beliefs and strategies. To start, we don’t believe in market timing, superior security selection and we don’t prescribe to Wall Street’s main street ideas. Our institutional approach is based on the fact that your allocation to cash, stocks and bonds represents 90-plus percent of the variations of your portfolio’s return (Modern Portfolio Theory research conducted by Brinson, Beebower, and Hood demonstrated this).

Furthermore, we utilize index type investments and to a lesser degree active (money managers, etc.) investments since research indicates that active management is expensive and in many cases underperforms indexes when evaluated based on after-tax returns. We are also constantly looking for non-stock-market-correlated investments to reduce volatility. All in all, we strive to minimize fees, expenses, and taxes since doing so provides you, if all things are equal, more money in your pockets (i.e., a higher rate of return).

What happens when you see the value of your investments go down? The first reaction would be to sell to avoid further losses. It’s a human emotional reaction to loss. Humans are not wired well, from an emotional standpoint, to cope with market volatility. 

Research by Dalbar and Morningstar (as discussed in our May 2008 article) proved that investors destroyed their rates of returns due to buying high and selling low, the opposite of what smart investing dictates. 

However, selling at market low means giving up on growth potential if markets rebound and locking in losses. Although it would be nice to predict the ups and downs of the market, history dictates otherwise. 

Your take-away from devastating investor behavior research boils down to changing the way you think about money and investing (see our book, Beyond Wealth, Finding The Balance Between Wealth And Happiness, on Amazon).

How to apply the methodology for financial survival

Here is how we apply this methodology. When the markets are up and clients are asking what investment is next, since that’s what their neighbors and colleagues are doing, we bring them back to one of the following questions.

How do you manage your emotions when there is a market downturn? The best way is by working with a financial adviser to get the best financial survival advice.  As a financial planning company, we work with you to test drive your investment strategy by showing you the possible trade-offs of various actions under different market situations. 

Would you like to improve your current lifestyle by taking a Queen Mary II cruise across the Atlantic with your children, making a trip to Sidney to visit an old aunt, or buying a vacation home by the casinos in South Lake Tahoe for the family to enjoy during ski season? Maybe you would prefer to help your grandchildren pay Stanford’s tuition, start a business, or buy their first home. Or maybe you have achieved tremendous success and wish to make a difference by gifting to the Cancer Society or your favorite charity.

We encourage you to dream and imagine the best life you can live now, based on the nest egg you have. As a result of this process, you decide to take money out of investments for your most precious desires. Wait one minute! Do you see what just happened? We just asked you to take money out of the portfolio while things are up, the opposite of what your instinct, Wall Street, and your golf buddies told you to do.

Money is but a tool. How we help you utilize this tool is critical to your life goals, financial success, and lifestyle. In our process, we removed you from the devastating emotional inclination which causes many investors to fail. As a result, you sold while the markets are up, which is exactly what you are supposed to do!

Another factor in capturing gains for financial survival is rebalancing your portfolio. Many advisers and investors don’t appreciate the power of rebalancing, but done correctly it helps you capture gains from up markets. If your allocation ought to be 55 percent stock, but it is 60 percent due to stock market gains, you should be selling stock and reallocating that money to bonds or cash. Avoid being passive in a volatile market.  While it’s essential to be comfortable with your investment plan and portfolio, it’s critical to understand your risk tolerance. 

As you can see, rebalancing takes money out of investment classes that have gained and allocates them to categories that have underperformed; leading you to invest intelligently (i.e., sell high and buy low).

Traditional financial planning projects your investments growing at a set percentage rate of 6, 8, 10, or 12, and therefore it assumes you have absolutely no investing risk (ridiculous), to show you a great future. It also assumes a set rate of inflation and a set rate of spending for the rest of your life (ridiculous)! When was the last time the markets, your income, and inflation were exactly the same year after year?

We apply highly sophisticated methodologies for financial survival, simulating 1,000 unique scenarios of investing, including inflationary periods, recessions, depressions, etc.

This results in wealth management decisions that account for real-life events and are focused on achieving goals without unnecessary risk to investments or lifestyle. You deserve honest advice and planning and should demand this from your adviser.C

Market downturns happen regularly, and it’s human to feel anxious and want to sell off before you make more losses. As financial planners, we work with you to rebalance your portfolio. We also help with scenario planning to simulate some investment situations that include depression, recession, inflationary periods, etc. 

Get in touch with the best financial advisor to talk about your investing time frame, your financial goals, and the strategies you’re considering to ensure that you are on the right track. 

Authors Haitham “Hutch” Ashoo and Christopher Snyder are partners at Pillar Financial Services Inc. in Walnut Creek. Ashoo is founder, president and CEO. Reach them at 800.669.6780.