As a high-net-worth individual, volatility can be stress-inducing. However, there’s no reason to panic.
While investors can’t control a volatile market or unforeseen events occurring somewhere in the world, they can control their wealth preservation strategies to protect their portfolios.
Market volatility is an inherent part of investing, and high-net-worth individuals must be prepared to navigate periods of economic uncertainty. In this article, we will provide strategies for wealth preservation during volatile markets, including hedging, diversification, and investing in safe haven assets like gold and property.
Understanding Volatile Markets
When used in the context of investing, volatility refers to the amount of uncertainty or risk related to the size of changes in a security’s value. The bigger and more frequent the price swings, the more volatile a market is said to be. Lower volatility means that the value of the asset may change steadily over time while higher volatility means the value can change dramatically over a short period of time.
So what causes market volatility?
Volatile markets are primarily driven by economic or policy factors including interest rate hikes and extreme weather events. Political instability and other global events, like the recent global pandemic or war in Ukraine, can also lead to market volatility.
Market volatility is a normal part of long-term investing. While it can be unnerving, investors that accept volatility as an integral part of investing can better prepare themselves for when it happens. For example, the market volatility that comes with bear markets can directly impact high-net-worth individuals as they watch the value of their portfolios plummet. However, this often spurs investors to rebalance their portfolio using a handful of strategies that allow them to capitalise on the situation. Let’s explore these strategies, below.
Hedging Strategies
While it might sound like a term used in gardening, “hedging” is a useful investing practice that every high-net-worth investor should know about.
In the stock market, hedging is a risk management strategy employed to offset investment losses by taking an opposite position in a related asset. Put another way, investors hedge one investment by making a trade in another. When someone decides to hedge, they are insuring themselves against a negative event’s impact on their finances.
Hedging techniques generally involve the use of financial instruments known as derivatives. Two of the most common derivatives are options and futures. With derivatives, you can develop trading strategies where a loss in one investment is offset by a gain in a derivative. A classic hedging example involves a company that depends on a certain commodity. For example, airlines buying oil futures several months ahead. Without hedging, airline operators would have significant exposure to volatility in oil price changes. One simple strategy is to buy current oil contracts which lock-in fuel purchases at today’s prices. This is advantageous if it is predicted that oil prices will rise in the future.
There are various hedging strategies, and each one is unique. It’s important to understand that hedging is a strategy used to reduce potential risk. Therefore, a reduction in risk always means a reduction in potential profits. So if the investment you’re hedging against makes money, you have generally also reduced your potential profit. However, if the investment loses money, and your hedge was successful, you will have reduced your loss.
Diversification Strategies
Diversification is another investment strategy that lowers your portfolio’s risk during volatility. Investors can diversify by investing their money across different asset classes such as shares, private equity, real estate and bonds. From there, investors can then diversify across the different options within each asset class. For example if you buy shares, you can then diversify across a range of different sectors such as financials, healthcare, energy and resources.
So how does diversification help during market volatility?
Diversification lowers your portfolio's risk during volatility because different asset classes do well at different times. So if one business or sector fails or performs badly, you won't lose all your money. This can lower overall portfolio risk and improve the chances of achieving long-term investment goals.
For high-net-worth investors, diversification is your best defence against a single investment failing or one asset class performing poorly due to market falls or fund managers failing.
Ways to diversify
- Asset allocation: in addition to allocating your investments among different asset categories, spread out your investments within each asset category. If most of your money is in one or two asset classes, research other asset classes you can invest in. For example, if you're mainly invested in one sector such as financial services, you should research other sectors such as mining, resources or health.
- Managed funds and managed accounts: Managed funds and managed accounts can help you invest across a range of asset classes. Some managed funds and managed accounts offer pre-made diversified portfolios.
- EFTs and LICs: Exchange-traded Funds (EFTs) and Listed Investment Companies (LICs) provide a low-cost way to invest in an asset class or diversify within an asset class.
- Invest overseas: Investing some of your money overseas will lower the risk of investing in a single market. For example, investments in Asian markets may perform well when the Australian market falls.
Investing in Safe Haven Assets
A safe haven is a type of investment that is expected to retain or increase in value during market volatility. High-net-worth investors can seek out a safe haven to reduce their exposure to losses in the event of a market downturn.
While a “safe haven” generally lives up to its namesake, it’s crucial investors use their due diligence. This is because assets that are deemed safe havens can vary depending on the specific nature of the down market. Safe havens in one period of market volatility may react differently in another, so there is no consistent safe haven approach other than portfolio diversity.
There are several investment assets that can be considered as safe havens. These include:
- Gold: Gold is the most common safe haven asset. However, other precious metals such as silver, platinum and palladium are also known safe haven assets. Because the price of gold often goes up when the prices of most other financial assets are plummeting, it can provide excellent diversification benefits for your portfolio.
- Treasury Bonds and EFTs: Government bonds are considered safe havens because they’re backed by the financial strength of the country issuing them.
- Defensive shares such as utilities: Some shares can also be viewed as safe-haven assets, for example, shares in utility companies, consumer staples, healthcare and other essential goods and services. These are known as defensive stocks and generally remain high even during economic downturns and recessions.
- Property: Real estate such as a home investment and property fund investment can also make great safe haven options. Real estate is typically considered safer than stocks, especially during times of high volatility.
Safe haven investments can be a smart wealth protection strategy for investors. Safe havens can offer stability and even increase in value during volatility. Yet, it’s important to understand that they can also provide less of a return during periods of market strength due to their lower risk.
Introducing VentureCrowd’s Investment Opportunities
VentureCrowd offers high-net-worth individuals access to diversified investment opportunities that can potentially protect their wealth in times of market volatility, including safe haven assets like property.
For many investors, property is appealing because it’s a tangible asset that can be controlled, and has the added bonus of diversification, which can minimise portfolio risk. Historically, property has been proven to be less volatile than shares and can hedge against inflation.
While market volatility is a normal part of investing, the good news is that you don’t need to worry about monitoring markets and managing your investment choices. VentureCrowd’s secure platform allows for 24/7 online management and monitoring of property investments. If your situation changes or you’re feeling wary of current market conditions, our multidisciplinary team can offer our expertise to support you on your investment journey.
A good defence is your best offence
Protecting your wealth in volatile markets requires a combination of strategies, including hedging, diversification and investing in safe-haven assets like gold and property. VentureCrowd provides a leading digital investment platform for investors seeking safe haven investment opportunities in property, with the expertise of multidisciplinary teams to support you throughout the investment process. Explore strategies for wealth preservation today and invest with confidence during periods of economic volatility. View our VC property deals and Venture deals, and book a call with one of our capital managers today.