How to Protect Your High Net Worth Portfolio from World Events Outside Your Control
Over the past thirty years, we’ve seen more than a few recessions in the market cycle. Through the ups and downs related to major world events, Pillar’s experts have managed high net worth and ultra-high net worth portfolios for families with $5 million to $500 million.
Our innovative process and use of historical data helps us create customized plans for our clients that optimize their performance through the highs and lows related to major world events, including what are known as black swan events, such as the first few months of the Covid-19 pandemic.
Table of Contents
- How to Protect Your High Net Worth Portfolio from World Events Outside Your Control
- Who’s Most at Risk from a Black Swan Event?
- What Is a Black Swan Event?
- How Black Swan Events Weaken Your Financial Security
- Predictable Events – Beyond the Black Swan
- Who Is Most at Risk from World Events and Economic Forces
- The One-Word Solution to Protect Your Portfolio
- Portfolio Protection Measures You Don’t Have Time For
- How a Wealth Manager Can Protect Your Portfolio against World Events
- Other Events that Upend Your Life
How do we do it? Are you at risk from the next black swan event? What can you do to protect your portfolio? Read on to find the path toward financial security that persists even in the midst of chaos. You can also claim your free copy of our hardcover book, The Art of Protecting Ultra-High Net Worth Portfolios and Estates.
Strategies For Families Worth $25 Million To $500 Million
The Art of Protecting Ultra-High Net Worth Portfolios and Estates
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
Who’s Most at Risk from a Black Swan Event?
As much as high net worth people dislike admitting it, no matter how much money we have, so much remains outside of our control. Some of the greatest threats to your portfolio come from adverse world events known as black swan events, most of which you cannot prevent or predict.
The good news is, you can protect your portfolio and long term financial security from the effects of black swan events. You can withstand the effects of big-scale calamities and tragedies.
To understand how, you must first distinguish the different types of black swan events that can happen and how they can affect national and global economies, eventually trickling down to cities like Walnut Creek.For our purposes, these events can be categorized in one of two ways:
1) Events with short-term high impact
2) Events with long-term high impact
As you’re about to see, the long-term high impact events are the ones you must be most concerned about. When it comes to investments, how to plan ahead for events you can’t predict or control isn’t so simple.
If you’re curious about black swan events and how they can impact your portfolio, read on or schedule a chat with one of our financial experts.
What Is a Black Swan Event?
The term ‘black swan event’ dates as far back as ancient Rome, even before real black swans had ever been observed.
Financial advisors have used the term ‘black swan event’ since 2001 to describe unpredictable events that produce major negative effects in the economy. The attack on the twin towers is one of the more clear examples of a black swan event.
Others include Black Monday in 1987, the dotcom recession (though that one was predictable, to a degree), the Fukushima reactor in 2015, and the first few months of the Covid-19 pandemic.
How Black Swan Events Weaken Your Financial Security
Black swan events certainly do impact your portfolio, but they only comprise part of the picture. As one article points out, for most unpredictable short-term events, equity prices tend to return to normal pretty quickly after a black swan.
The initial reaction is usually based on little more than irrational panic, not real market forces, so the correction back to normal is swift. You saw this even with Covid-19. The market bounced back within just a few months.
But the other part of the picture comes from the predictable and known events that will assail your portfolio. Those don’t have any less impact than black swans.
Predictable Events – Beyond the Black Swan
For instance, high inflation will return again someday. When it does, it will damage the economy and weaken your portfolio. Not knowing when it will return has nothing to do with the reality of its effects.
Also, as technology continues to advance, certain job sectors will be eliminated. If the pace of innovation outpaces society’s ability to adapt, this will produce short term economic problems.
These are known and predictable trends and events. Combine these with black swan events, and you can envision dozens of scenarios that may imperil your investment performance and retirement plans.
Just one of these predictable world events can cause great economic damage, even more than a black swan event:
– Climate change and the politics surrounding it – effects on industry, population shifts, jobs, technology
– Trade disputes and tensions involving nations (China, Russia) and agreements (NAFTA)
– Geopolitical shakeups involving alliances such as NATO, the UN, G-7
– Wars and attacks
– Pandemics and the reaction to them
– Large scale natural disasters
– Bubbles inflating the value of markets or specific sectors
– Advancing technology that eliminates jobs
– Hong Kong unrest
All of these scenarios can produce a highly negative impact on the economy and therefore on your portfolio. Some produce short term damage; some produce long term. If more than one happens simultaneously, the damage can be severe.
Who Is Most at Risk from World Events and Economic Forces
The higher risk investments in your portfolio face the greatest chances of incurring huge losses when world events and black swan events lead to economic stagnation or recession.Having a trusted advisor working on your behalf before these events arrive can save you from disastrous decisions and missed opportunities.
That doesn’t mean you should shed all your higher risk investments. But consider the sources of your greatest wealth. You should pay the most attention to the areas with the highest concentration.
For instance, Uber and Lyft both launched their IPOs with great fanfare and enormous valuations, both of which fell quickly afterward. Neither company has ever made a profit. And, they attracted lots of highly skilled (read: expensive) workers by paying them with stock options.
Put these three facts together: Huge valuation, no profitable years ever, workers paid with stock options.
Even if your company is in a stronger position than the ride-sharers, if a large portion of your wealth is concentrated in stock options, your portfolio lies on shaky ground.
If global events and economic forces turn the tide against your company and its value plummets permanently, you stand to lose a lot of money. How much are those Uber and Lyft stock options really worth? Would you bank on them still being worth that much in 10 years? 20 years? Look how many fewer people used them when Covid hit.
Other than Microsoft, Amazon, Google, Apple, and perhaps a handful of others, not many tech companies have even existed for 20 years, let alone done well. And the tech collapse in 2000 was the primary cause of that recession, hence its moniker today as the ‘dotcom bust.’
You are at risk from the effects of global and black swan events if your wealth is highly concentrated in stock options in your company. You’re also at risk if most of your portfolio is invested in just one market sector, such as technology, or one commodity.
And, you’re still at risk if your entire portfolio is in equities, even if they’re well-diversified. When the next bear market hits, you stand to lose an average of 40% of your value (based on the 13 previous bear markets since 1929).
Over-investing in any one area puts you at greater risk. Are you over-invested? Find out by talking to a wealth manager.
The One-Word Solution to Protect Your Portfolio
The simple solution to all of the above is to diversify your portfolio.
However, that ‘simple’ solution quickly entangles with its own complexity. As Kiplinger puts it, “Diversification in contemplation of macro events is a little more involved than simply spreading your money out among a lot of equities and bonds.
It’s important to structure your portfolio with varying types of asset classes that act as counterweights in responding to different economic or financial circumstances.”
For instance, if you spread out your money equally among Amazon, Facebook, Google, Uber, and Apple, you are more diversified, but you’re not balanced.
These are all tech companies, so if the tech industry suffers setbacks due to predictable global or black swan events (including the effects of harsh regulations, something we’re already seeing happen in some nations), you have no counterweights in your portfolio.
Investing all your money in a Nasdaq-based index fund would be extremely risky for this reason.
Further complicating diversification is the truth already mentioned earlier. You can be diversified but still be invested 100% in stocks, and thus at great risk from the effects of negative world events and black swan events.
The surest measure of wealth protection comes from asset allocation, meaning expanding your wealth into bonds, cash, and perhaps other assets like real estate and even collectibles.
But as the Kiplinger quote makes clear, how you achieve the most ideal and optimized allocation that balances risk against long term growthisn’t simple at all.
In fact, this is the question that few can answer. This is the reason to get a financial advisor.
And if you’re a high net worth or ultra-high net worth investor, you don’t just want a financial advisor. You want a wealth manager – a specialized expert who works exclusively with investors of your financial caliber. That means devoting time and energy to choose the right financial advisor to handle your portfolio.
Portfolio Protection Measures You Don’t Have Time For
Much advice gets proliferated about how to protect your portfolio against unforeseen and uncontrollable world events and black swan events, such as this article on portfolio protection.
The prevailing intent is to prevent large losses and protect your gains.
Here’s the problem with most of this advice: It’s written at a level that assumes a high degree of financial and investment expertise.
Most of their recommendations require either:
– Pre-existing expertise about finance, investing, and markets
– A high learning curve
– Extensive ongoing research
– All of the above
They will recommend strategies such as ‘put options’, stop losses, and dividends.
And to be clear, these strategies can be helpful – if you know how and when to use them.
If you don’t, do you really want to invest the many hours per month required, in perpetuity, to learn what it takes to effectively apply these strategies?
Most high net worth investors don’t have the time or the desire for this sort of thing. You didn’t become a high net worth individual by learning how to do everything yourself.
You got there in part because you know how to delegate tasks to experts in other fields, which frees you up to focus on maximizing your own strengths.
Protecting your high net worth investment portfolio against black swan events is no different.
How a Wealth Manager Can Protect Your Portfolio against World Events
An experienced ultra-high net worth wealth manager understands how to achieve the optimized balance of counterweighting asset classes, which offers your best protection against black swan events and other external economic forces.
That manager will balance your risk while maximizing performance, and project your long term financial security, even in the face of unknown and uncontrollable world events.
At Pillar Wealth Management, our investment planning process was created to achieve this so our high net worth clients can rest securely, even when seemingly catastrophic black swan events threaten the global or national economy.
How do we do this?
Let’s start with a question:
What if I could remain financially secure no matter what’s going on in the world?
How valuable would that peace of mind be for you?
When Covid-19 hit, we all saw the predictable chaos and panic in the markets. Hardly any of our clients even called us, because they knew they didn’t have to worry.
Our investment planning process involves much more than just spreading money around various equity funds, reporting the results to you, and hoping it will get you through your retirement no matter what’s happening in the world.
Our approach achieves far more security for you than that. Using Pillar’s system, you will be able to:
– Forecast your long term portfolio performance based on historical market data that includes black swan events and everything else, dating back to the 1920s
– Determine the security of your portfolio, even 30 or 40 years out
– Make immediate adjustmentsto your plan – if necessary – when a predictable global economic or black swan event takes place
– Adjust your short and long term goals in response to world events
– Maintain financial security at all times
– Eliminate worryabout the future – even when global markets suffer from uncontrollable events
– Our system is customized to your exact financial and life situation.
What does ‘customized’ mean?
It means everything about you factors into your plan. If world forces and black swan events threaten your portfolio and affect your long term plans, you can contact us and immediately find out how this event has affected your portfolio, even 30 or 40 years out.
You will be able to see if your portfolio remains secure, or if you need to make any adjustments to protect it from the effects of whatever is going on in the world. If you do need to make adjustments, you’ll be able to do so in five areas:
1.How much you spend
2.How much you save
3.How much you leave to your heirs
4.The timing of planned major expenses
These are like five levers.
You pull one; your portfolio projections for the next several decades get re-calculated. Pull another one, they re-calculate again. If black swan events threaten your business, your real estate, or your investments, we can look at historical market data and how it has performed through similar events, applied to your specific portfolio.
If your portfolio remains secure, you may not need to make any changes at all. If your portfolio falls outside our set of pre-calculated boundaries that designate your long term financial security, we would work with you to make adjustments in some combination of those five areas.
Once adjustments have been made and your security is restored, you can stop worrying about the news. You can go focus on helping your co-workers, employees, family, and friends navigate their own challenges resulting from whatever has gone wrong in the world.
You can cease worrying about your money, and focus on helping other people.
That’s what our portfolio planning system achieves for all our high net worth clients. Contact Pillar Wealth Management to schedule an appointment and get the conversation started.
Other Events that Upend Your Life
A black swan event upending your portfolio is just one of many ways your life and finances can encounter peril.
On the flip side, even something positive like a large inheritance can cause unexpected challenges in your financial planning. Here’s your 7-step high net worth inheritance planning guide
If you’re concerned about being ill-prepared for the next black swan event or costly economic situation, see how your portfolio will hold up by getting a Wealth Management Analysis report.
Schedule a free and customized Wealth Management Analysis meeting with one of our experienced financial advisors.