Strategies to protect and grow a high-net worth portfolio, even in a recession

One effective strategy in a bear market is tax-loss harvesting. This strategy realizes losses today that can be offset against future capital gains. Tax-loss harvesting is particularly effective for individuals who’ve just had a liquidity event and will pay large federal tax liabilities next year. These tax-losses work to mitigate those future liabilities.

Another way to diversify your risk is with alternative investments. Alternatives are generally less correlated to broader stock and bond markets and have exhibited less volatility over time, serving as the ballast of a high-net worth investor’s portfolio. A few strategies that have been successful in protecting capital this year have been long/short equity, multi-strategy, relative value fixed income, private real estate and private equity.

Additionally, there are numerous opportunities in the equity market to buy high-quality growth compounders. These are companies that trade at below historical average price/FCF multiples and have higher EBIT margins and revenue growth than the broader market. These high-quality companies have been sold off in tandem with much lower-quality companies and now present attractive opportunities to invest at much lower valuations.

Within fixed income, there has been a meaningful pick-up in yields across taxable and tax-exempt bonds this year. There has been modest spread widening on recession fears recently, creating good entry points into select investments in investment grade and high yield credit. Should an economic recession be shallower and more balanced, these select investments should produce attractive risk-adjusted returns.

Lastly, an asset class that has re-emerged is cash. Money market funds are now yielding 1.5% or more, as the Federal Reserve has taken fed funds to 2.25-2.50% through the July meeting. This rise in the Fed Funds rate has benefited money market funds and now serve as sensible place for investors to get paid on excess cash.

Now more than ever is a critical time to create a financial plan or update an existing plan. Among the many benefits of a financial plan is the ability to “stress test” your financial situation for uncertain events, such as inflation, market downturns, health care events, long-term care events and other factors that may impact your plan.

Using a financial planning tool known as Monte Carlo, your financial planner can include assumptions that take into account, for example, the impact on your financial situation if inflation remains at current rates, increases further or decreases. Many current financial plans built without Monte Carlo have held inflation steady at rates experienced prior to 2022, meaning that the client’s purchasing power is significantly understated with current prices. This type of planning gives you added assurances that you are on the right track, despite outcomes outside of your control.

Similarly, now is the time to re-evaluate your estate plan, or create one if you don’t already have one. Between the pandemic, the economic slowdown, the situation in Ukraine, market fluctuations and inflation, among other likely concerns, you’ve likely had time (and reason) to rethink your goals and objectives.  At its simplest, estate planning is about getting the right assets to the right people, at the right time, and in the right way.  Updating or creating your estate plan ensures that you can accomplish what’s important in this time of uncertainty.  In addition, with interest rates rising quickly, you may be able to take advantage of estate planning strategies that benefit from lower interest rates.  This is yet another reason to act quickly.