Preserving wealth in uncertain times

Volatility has become the norm and in many ways calls into question our strategies in terms of preserving wealth under the present conditions.

There has never been a time of such uncertainty for investors as we have experienced in the past 16 months. A table highlights the volatility in the S&P 500 index from 1969 to now, showing the number of times that the index has fluctuated, up or down, by more than 5% in a single day. There was only one occurrence in the 144 months or 11 years from 1969 to 1980 and an astounding 21 occurrences in the past 16 months.

This volatility raises questions. While we accept that equities are reliable wealth accumulators in good times, do they serve as efficient wealth preservers in times of such relentless uncertainty? Most investors need the assurance of some degree of predictability. These same investors often look to their advisors and ask why they did not time the market properly? Where are all the experts? How could they not have seen this coming?

Back to basics

Given our inability to predict with any element of accuracy the performance of markets in the short term, we are forced to go back to the drawing board and re-examine our investment strategies and reaffirm the basics of any sound investment strategy.

*Avoid the temptation to rely on so-called experts as statistics show they are wrong more often than they are right. Follow a proven method of building wealth and stick to the basics.

*Avoid the temptation to run with the herd as well as the knee jerk reaction of jumping out of equities when markets become less predictable.

*Diversify, appropriately, between asset classes, geographic location and currencies.

*In the accumulation phase of an individual’s investment plan, exposure to equities should be material and exposure to cash and more defensive assets reduced. Progressing into the preservation phase, the emphasis should shift to more predictable investment solutions.

In interrogating one’s investment strategy the last period of time has taught us a few lessons well. The first is to have a high enough conviction rate to stay in the market when everything around you is telling you to get out. The second is to appropriately choose defensive assets such as guaranteed products, hedge funds, bonds and cash. And finally, it is no longer a case of whether one should be offshore, the decision is rather how much and in which currencies one should be invested.