How to Survive the Next Financial Meltdown – for High Net Worth
Why Ultra-High Net Worth Investors May be Heading for Financial Meltdown – and Their Fiduciary Advisors Aren’t Stopping Them
How to Survive the Next Market Crash without Losing 33.8% of Your Wealth
When times are good, every financial advisor is a genius.
You’re doing well. So is your neighbor, best friend, boss, and most of your colleagues. You’re doing well because the market is doing well, and investing is easy when the market is doing well. Your financial advisor would have to be a real knucklehead to lose money or get lousy growth during the last seven to ten years.
But when times turn bad, most financial advisors – including the fiduciaries – are exposed for what they really are: Button pushers just following the herd, doing what everyone else does, telling you that “markets always go up over time” and “just wait this out and you’ll make it all back.”
If you followed the herd in 2008 and had $10 million invested, today you could have anywhere from $12.94 million to $20.35 million – depending almost entirely on what your advisor did. Which would you rather have? Read on to see what’s behind this cavernous difference in growth.
Table of Contents
- Why Ultra-High Net Worth Investors May be Heading for Financial Meltdown – and Their Fiduciary Advisors Aren’t Stopping Them
- Financial Meltdowns of the Last 25 Years
- What Most Advisors Say When the Market Crashes
- Back to the S&P – 20 Years of Middling Performance
- Beta: Measuring the Risk and Volatility of the Stock Market
- Applying Beta to the 2008 Financial Meltdown
- Gain During Good Times. Lose Less During Bad Times
- Are my best interests being met by this?
Financial Meltdowns of the Last 25 Years
Consider this historical market performance data:
This graph shows the performance of the S&P 500 index from 1995 to 2020. It therefore includes the last two market crashes, the dotcom bust of 2000 and the financial crisis of 2008.
Notice the peaks right before each of those collapses. They are nearly identical in height. If you trace a line from those two peaks and extend it to the right, you don’t reach that same performance level again until 2013.
That means, if you invested 100% of your money in the S&P 500 in 1999, you would have the same amount of money 13 years later.
No growth. For 13 years.
That’s not 0%. That’s worse than zero, because of inflation and your own rising expenses and changing lifestyle. Losing huge percentages of your wealth during a market crash is extremely difficult to recover from without suffering permanent long term damage.
The goal of a financial advisor is to give you peace of mind. If you’re worried about market corrections, crashes and collapses, something’s not quite right.
The Most Popular Portfolio Loses Millions
We meet with all sorts of ultra-high net worth and high net worth investors. We cannot count how many of them come to us with portfolios created by other advisors – including fiduciaries – that are allocated 60% equities and 40% bonds.
The 60/40 split is used by some very big players in the financial industry, including some well-known pension funds and college endowments. It is very popular.
But take a look at this graph:
Alt text: graph shoes how a 60 percent stock 40 percent bond portfolio performed from October 2007 to march 2009
What you see is how a typical 60/40 portfolio performed from when the financial crash began in October 2007 through March of 2009.
It lost 33.8%.
If you opted for high risk because you want to “beat” the market and went with 70% stocks and 30% bonds, you would have lost 39.5%.
If you parked all your money in the S&P 500, you would have lost 55.2%!
Maybe you remember the feeling of disturbing dread from that time period. For ultra-high net worth investors, these losses amounted to millions, perhaps tens of millions of dollars. Gone in months.
We’ve had people come to us after losing staggering amounts of money in a market crash using commonly accepted investment strategies like these simple asset allocation splits.
One family that used to have $440 million came to us with just $70 million left – an 82.5% loss. We’ve seen $8 million whittled down to $2 million – a 75% loss. After the 2000 financial meltdown, we met with a couple that had $5 million of liquid assets to invest. When the male half of that couple gave us that number, the female half gave him a strange look. It was a look of shock, because she didn’t realize they had $5 million.
Last she knew, they had $32 million. They lost 84% of their wealth in just two years.
You probably know someone with a similar story. Maybe it happened to you.
And maybe you got suckered into believing another wrongheaded axiom of ‘common wisdom.’
What Most Advisors Say When the Market Crashes
Most advisors – again including most fiduciaries – will tell you that everyone loses during a market crash, but the key is to just “stay the course.” Don’t panic, stay invested, markets always go up over time. Just wait this out, and you’ll recover your losses.
Can you imagine being told this by your fiduciary advisor after he or she lost nearly 40% of your wealth with a 60/40 split during a financial meltdown?
What would you think of them in that moment?
Would you still send them a Christmas card that year? Invite them to your retirement party? The retirement that now looks far more perilous than it did a year ago?
“Markets always go up over time” is an insult to wealthy investors who have lost millions of dollars due to terrible financial planning like a 60/40 split.
A true fiduciary would be explaining how they helped you avoid the huge losses that are walloping everyone else.
If you’re looking to find the right fiduciary financial advisor, one that puts your interests above his or her own, you’re encouraged to schedule a chat with Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Be forewarned: He doesn’t believe in “common wisdom.” He’ll give you straight talk based upon on 30 years of experience.
Back to the S&P – 20 Years of Middling Performance
Over the last 20 years, the S&P has returned about 6.75% annual growth. If you had a 60/40 split over the last 20 years, you did even worse, making 6.5%.
And if you’re paying an advisor for the privilege of this growth, you’re probably paying about 1%, so your actual annual growth is more like 5.5%, over 20 years. Why so low?
Because that 13 years of flatline performance took too long to overcome. In 2009, you would have had almost 60% less money than you had in 2000. That’s a full nine years later, and you have 60% LESS money!
Imagine if you had retired in 1999.
“Stay the course” would have told you things would be fine in a few years. Nine years later, it sure didn’t look that way. That 60% loss doesn’t include any withdrawals on your part to fund your lifestyle! So now you’re heading into your 70s or 80s, and you’ve got nothing to show for all those years – assuming you haven’t depleted your savings.
Do high net worth families ever run out of money before they die? Yes. And this is how.
So what can you do?
Is there a better way?
If even fiduciary advisors – ones who are supposed to be acting in their clients’ best interests – are using these kinds of methods, how do you avoid suffering such great losses if the next financial meltdown hits right before you planned to retire?
The answer begins with a term you may not have heard before: Beta.
And if you’re looking to find the right fiduciary financial advisor, one that puts your interests above his or her own, you’re encouraged to schedule a chat with Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. He can quickly assess whether your portfolio is over exposed and give you a couple proven ideas on how to protect it, especially in these currently volatile markets.
Beta: Measuring the Risk and Volatility of the Stock Market
The math behind beta gets complicated fast, so we’re going to steer clear of that. If you love that sort of thing, here’s an article that explains some of the calculations related to beta.
Here’s the basic idea behind beta:
The lower the number, the lower the risk associated with a particular stock, portfolio, or asset allocation such as a 60/40 split. The higher the number, the greater the risk. A beta of 1.0 represents a standard line.
As the Investopedia article puts it,
“A beta value of less than 1.0 means that the security is theoretically less volatile than the market, meaning the portfolio is less risky with the stock included than without it. For example, utility stocks often have low betas because they tend to move more slowly than market averages.
A beta that is greater than 1.0 indicates that the security’s price is theoretically more volatile than the market. For example, if a stock’s beta is 1.2, it is assumed to be 20% more volatile than the market.”
The S&P 500 has a beta of 1.0. A 60/40 portfolio will have a beta of approximately 0.6, because of its 60% equity component. See how that works?
Utilizing the full gamut of investments available to us, we developed a lower-risk portfolio with about 30% of the risk of a 60/40 split. Our portfolio has a beta of around 0.2.
As a caveat, because beta is calculated based on historical data, it cannot be relied upon to predict future results. But it serves as a valuable tool to assess the risk of a particular investment.
Applying Beta to the 2008 Financial Meltdown
The goal here is simple: Reduce your risk but not your returns. We want you to generate strong performance, but not lose tons of money when the market crashes – which it most certainly will at some point, quite possibly during your retirement if you plan to be retired for any length of time.
Suppose you have $10 million in investable assets. How would you have performed during 2008, using the approaches we’ve discussed?
In 2008, the S&P 500 lost 41.2%.
A 60/40 split lost 24.8%.
The lower-risk portfolio we built would have lost about 7.5%.
If you began 2008 with $10 million, here is what you would project to have left after 2008 under these scenarios:
- S&P 500: $5.88 million left. Lost over $4 million in one year
- 60/40 split: $7.52 million left. Lost nearly $2.5 million in one year
- Lower risk method: $9.25 million left. Lost $750 thousand.
This kind of data is, as always, somewhat speculative. It does not account for taxes, fees, life expenses, and other costs.
Remember back at the start of this article – what happens during good times?
Everyone gains. Everyone does fairly well. Sure, some earn 8%, some 10%, some 12%. Some lose more in taxes, others less. Some take bigger risks that pay off, others take risks that fall short. But everyone gains during good times. At least they should, because it’s pretty easy to do so.
If you’d like to talk to a true fiduciary financial advisor, one that puts your interests above his own, you’re encouraged to schedule a chat with Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. By looking at your portfolio, he can tell you whether your current advisor is doing a good job–maximizing returns, but maybe more importantly, protecting the wealth you’ve earned.
Gain During Good Times. Lose Less During Bad Times
This is what we as true fiduciaries obsessively pursue for all our clients. You should obviously make money when things go well, but you should not lose nearly as much when things go badly.
Consider where a portfolio would end up, ten years after a market crash, using these very divergent approaches to portfolio planning. Over 10 years, assuming a cumulative and hypothetical 120% growth (which is actually less than from 2009 to 2019), look how these three hypothetical portfolios would be doing:
- $5.88 million becomes $12.94 million ten years later
- $7.52 million becomes $16.54 million ten years later
- $9.25 million becomes $20.35 million ten years later
They all began with $10 million in 2008. Then a financial meltdown hit, and they all lost something. But they lost massively different amounts. Then, the market rebounded, and they all gained.
But look how much farther ahead the third one is. The money has doubled, in spite of a market crash. The first option, based on tracking the S&P 500, hasn’t even made 30% growth over a ten year period. That’s about 3% per year!
Are you getting the point?
Losing huge amounts of wealth in a financial meltdown and then “weathering the storm,” “staying the course,” and not panicking because “markets always go up over time” is a terrible, stressful, anxious, uncertain experience.
And it’s ten times worse if it happens after you have retired.
And as a fiduciary, we do not believe we are fulfilling our duty to our clients if we deliver that kind of experience for them. We want you to survive a financial meltdown with your confidence and peace of mind intact.
If your current advisors say they are fiduciaries, but they have invested your portfolio in something like a 60/40 split, you ought to ask yourself a serious question:
Are my best interests being met by this?
If you’re looking to find the right fiduciary financial advisor, one that puts your interests above his or her own, you’re encouraged to schedule a chat with Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. He can quickly assess whether your portfolio is risk heavy and give you a couple proven ideas on how to protect it, especially in these currently volatile markets.