Learn how high net worth individuals are riding out the bear market and protecting their money in uncertain economic times.
Bear markets are often defined as periods in which the stock market has a decline of 20% or more that is maintained for a period of at least two months.
Bear markets are difficult to predict and manage, which presents a substantial challenge. The initial signs of a normal market fall emerge, which is then followed by a period of market correction, which is then maybe accompanied by early efforts to seek out discounted assets.
When the negative trend becomes indisputably apparent, stock prices have already suffered a decrease, which prompts investors who have not yet reduced the risk in their portfolios to examine the justification for doing so.
They wonder whether taking such a step would just lead to an increase in the costs that they have incurred as a result of their failed efforts to time the market.
It is not ideal to take a passive strategy, primarily because bear markets often last for a longer period of time than a few months at a time. Bear markets might even last for years.
According to the findings of research that was carried out by Ned Davis, the S&P 500 index had a total of 27 distinct occurrences of drops that amounted to twenty percent or more between the years 1929 and 2022. Around 292 days was the typical amount of time that these decreases were seen to continue.
As a consequence of this, it is possible that investors have access to a bigger quantity of time than they believe they have in order to respond to the deteriorating performance of the stock market.
Either by the use of cautious defensive tactics in portfolio management or through participation in speculative activities that predict further declines, this goal may be accomplished.
If you have any questions or want to invest as an expat or high-net-worth individual, you can email me (advice@adamfayed.com) or use these contact options.
What is a Bear Market?
A bear market is defined by a prolonged drop in the prices of various investment options. In most cases, this takes place when a well-followed market index has a decline of 20% or more from its most recent high point.
When compared to a bear market, which is the opposite of a bull market, a terrible market is characterized by considerable gains of less than 20%.
Bear markets are commonly characterized as occurring when the market experiences a fall of 20% or more in value; however, it is important to note that these market downturns usually demonstrate a more significant and extended decrease in value.
Even while there is a possibility of brief upticks in price known as “relief rallies,” a bear market is often defined by an overall downward trend.
Bear markets may be identified by the widespread pessimism among investors as well as a reduction in their level of confidence.
When market circumstances are negative, investors often display a predisposition to ignore favorable news and remain consistently engaged in quick selling activity, which exerts downward pressure on asset prices.
As a consequence of this, investors have the impression that the prices of shares are being set in a way that is desirable, which prompts them to start making purchases, therefore officially bringing an end to the bear market.
Both the whole market as a whole, such as represented by the Dow Jones Industrial Average and individual shares may experience bear markets at the same time.
When investors have a negative perspective on a particular company, it is unlikely that this attitude will have a big influence on the market as a whole since it is unlikely that investors will have the same outlook on other stocks
Nevertheless, when a market or index is experiencing a downward trend, the majority of firms included inside it tend to demonstrate a loss in value. This occurs regardless of the great news and profits growth experienced by the individual companies.
How High Net Worth Individuals Are Riding Out The Bear Market
Reassessing Your Positions
Bear markets, on the other hand, often show the required changes that need to be made in an investor’s investment portfolio at the time of the market downturn.
It is conceivable for an individual to come to the conclusion that their asset allocation is riskier than what they are comfortable with or that they do not have sufficient exposure to a major region. Both of these realizations are possible.
Given the present high levels of inflation, it is possible that it may be beneficial for you to consider raising the amount of equity assets that is included in your asset allocation.
This is how high net worth individuals are riding out the bear market. This tactical strategy is aimed at reducing the negative effect that growing living costs will have on your overall financial portfolio.
The current time gives an excellent opportunity to investigate alternative investment opportunities, such as hedge funds, private markets, real estate, and digital assets like cryptocurrencies.
According to the findings of a recent survey that was carried out by EY, it was determined that alternative investments are pursued by thirty percent of those who have a high net worth, and by an impressive eighty-one percent of those who have an ultra-high net worth, which is defined as having assets that are more than thirty million dollars.
Throughout the course of history, access to these assets has historically been limited mostly to private persons who satisfied certain minimum investment standards.
However, there is a rising tendency among financial institutions to increase the variety of investment choices that are made accessible to the general population.
This does not suggest that one should participate in speculative acts or invest considerable resources in assets that are prone to price swings, such as Dogecoin. On the other hand, including a specific amount of different elements might prove to be advantageous.
Luxury goods appeal to people from a variety of socioeconomic backgrounds, including high-net-worth investors, who share this preference.
They too have a propensity to make mistakes, but they minimize their exposure to risk by limiting the number of speculative wagers in which they participate. People are still able to participate in gambling activities, but they report feeling lower levels of enthusiasm as a result.
Mitigating Potential Loss by Hedging
Hedging risk is how high net worth individuals are riding out the bear market. A variety of resources are available to investors who want to reduce the dangers connected with stock investing or make the most of the opportunities presented by tactical maneuvers during a bear market.
Among the available possibilities for financial investments are long-term Treasury bonds, the value of which is anticipated to rise in the event that a bear market is followed by an economic downturn.
In addition, there is the availability of inverse exchange-traded funds (ETFs), short positions on specific stocks, and put options with the purpose of capitalizing on short-term declines in stock prices.
Structured investment products, such as annuities for high net worth individuals, have the ability to give some level of protection against prospective losses, but in exchange, they limit the amount of potential profits that may be realized.
A cost is incurred by every hedging strategy, which may be expressed as the amount paid for an option premium or, in a less obvious form, as the restriction placed on the possible return that can be earned by the owner of an annuity contract.
When applied to a stock portfolio, the application of tactics for diversification and de-risking might potentially give comparable benefits while incurring less costs.
Make Use of Dollar-Cost Averaging
Dollar-cost averaging is how high net worth individuals are riding out the bear market. If a stock in one’s portfolio has a drop in value of 25%, going from $100 per share to $75 per share, this is said to be a bear market.
If a person has cash for the purpose of investing and wants to buy more shares of a certain business, there may be a strong temptation to make a purchase when it is noticed that the price of the stock has drastically decreased. This is because the individual will be able to acquire more shares of the company at a lower cost.
The problem that we are now dealing with is that there is a good chance that your statement is inaccurate.
There is a chance that the stock has not yet reached its lowest point at $75 per share; rather, it has the potential to experience a loss in value that is at least fifty percent more than what it was when it was at its highest point.
It is a risky endeavor to try to pinpoint the exact moment or “time” at which one should join the market when prices are at their lowest.
A method that is considered to be safer and more prudent is known as dollar-cost averaging, and it entails making continuous investments in the market via the use of a technique with the same name.
The term “dollar-cost averaging” refers to the strategy of steadily investing money over a period of time, often in amounts that are roughly equivalent to one another.
This technique allows for the steady distribution of your purchase expenditure over a period of time, limiting the concentration of money into a company when its value is at its greatest, while simultaneously profiting on market downturns.
Bear markets often cause people to experience sentiments of dread and trepidation. Despite this, there is a lot of data from the past that shows how resilient the stock market is and how it has a propensity to rebound over time.
Buying While Prices Are Low
Buying more shares is how high net worth individuals are riding out the bear market. During times of market improvement, investors are likely to feel more satisfied with their holdings, since this is to be expected.
A bear market does, however, provide an opportunity to purchase shares at a lower price, which then has the possibility of increasing in value as a result of compounding. This opportunity presents itself when the market is in a bearish state.
People with a high net worth are able to profit from the pessimistic market sentiment that now prevails. When there is a rise in demand and consumers are actively engaged in purchasing activities, then is the best time to make a purchase since more people will be buying at that moment.
When one is feeling anxious, it is a good idea to think about how one’s life will be at the same place and at the same time the next year.
It is important to consider whether the prevalence of COVID-19 will follow a declining trend or an increasing trajectory throughout the course of that time period.
Will there be an increase or a decline in the effective efficiency of supply networks? Which is more likely, an increase in prices or a decrease in prices during the next several years?
It is wise to participate in purchase activities while pessimism or anxiety levels are high since this is often the best time to do so.
As a consequence of this, making a buy right now is something that should absolutely be considered.
If one were to imagine a hypothetical situation in which they are able to mentally separate oneself from the situation at hand and transport their awareness to a moment in time that is six months in the future, they would discover that their level of agitation is much lessened in that state. The ambiance is one that one may characterize as being somewhat unsettling.
Being Defensive
Being cautious and being on the safer side is how high net worth individuals are riding out the bear market. It is essential to keep in mind that, even within asset classes, there are choices that range from aggressive to more cautious investments.
For example, stocks and other equity investments are often considered to have a significant degree of risk. Having said that, it is important to highlight the fact that there are specific categories of businesses that display far lower levels of volatility.
Within the world of stocks, conservative industries such as consumer staples, utilities, and health care have historically shown higher performance during times of poor market conditions.
Regardless of the state of the economy or the state of the market at the time, the particular sectors in issue show a steady demand for the goods and services that they provide.
In addition, these companies generate a significant amount of income, which, as a result, enables them to provide dividend yields that are rather high.
When opposed to small-cap or growth stocks, the shares of these sectors have a greater capacity to withstand volatile market conditions due to the presence of a considerable number of large-cap firms that are in possession of sturdy financial statements.
It is common for the relative riskiness of equity investments to rise during a bear market. On the other hand, the evidence shows that equities of higher-risk firms do not always outperform those of lower-risk companies over the long run.
This suggests that reducing the proportion of high-risk stocks in an investment portfolio when the market is doing poorly may have the potential to result in long-term gains.
Portfolio Diversification
Making strategic asset allocation is how high net worth individuals are riding out the bear market.
When contemplating the purchase of stocks at lower prices, increasing the diversification of one’s portfolio by including a number of different assets is an extra desirable technique that may be pursued regardless of whether or not a bear market is currently in effect.
When there is a bear market, it is common to see that the member companies of a certain stock index, such as the S&P 500, have a fall in the price of their shares of stock.
However, it is essential to keep in mind that these drops may not necessarily be distributed in the same manner among all of the firms included in the index.
As a result, the necessity of ensuring that one’s portfolio is sufficiently diversified cannot be emphasized.
It is in a person’s interest to minimize the overall losses sustained by their investment portfolio in the case that the individual has distributed their capital amongst assets that have performed well as well as those that have performed poorly.
If one had the capacity to determine in advance who would win and who would lose, they might plan accordingly.
As a result of the historical association between bear markets and economic recessions, investors often demonstrate a preference for assets that give a more consistent rate of return during such times, regardless of the economic circumstances that are now in effect.
The following investments might be considered “defensive” if they are included in a portfolio as part of an effort to apply a strategy known as “defensive.”
Dividend-Paying Stocks
In spite of the fact that stock prices have not been moving in an upward direction, a sizeable number of investors have expressed a desire to receive dividends as a kind of compensation.
Therefore, businesses that provide dividends that are more than the norm for the sector are likely to draw investor attention during times when market circumstances are defined by being pessimistic.
Bonds
Due to the fact that bond prices often have an inverse connection with stock prices, bonds are considered to be an attractive investment alternative when the market is experiencing periods of volatility.
Bonds are an essential component of any investment portfolio, and the addition of extra high-quality, short-term bonds to an existing portfolio has the ability to reduce the negative consequences that might arise from exposure to a declining market.
Following Your Trading Plan
Sticking with your original trading plan is also how high net worth individuals are riding out the bear market.
There is no getting around the undeniable reality that the time to participate in preparations for a bear market is before its occurrence.
This is the best time to take advantage of this window of opportunity. In order to maximize their returns, sophisticated investors diversify their holdings across a variety of asset classes, including cash, fixed income, equities, and real estate, while also taking into account the amount of time they have available to invest.
There is no need for concern if people do not foresee the requirement of utilizing their assets for a protracted length of time, covering a number of years or even decades, since this indicates that they will not need to utilize their assets in the foreseeable future.
There is a pervasive feeling of anxiety and pessimism in the present discourse, and those who possess a high degree of astuteness are giving priority to long-term issues rather than focusing just on the near future, which spans six to twelve months.
It is not impossible that they have already started the process of rebalancing their asset allocation in order to boost the amount of cash they have on hand.
When people are experiencing a state of euphoria or excessive optimism about the circumstances of the market, it is often recommended to deliberately lower one’s financial exposure and raise the allocation of liquid assets.
This is because individuals in these states are more likely to make risky financial decisions. During a period when the market is in a slump, it is desirable to have a larger amount of money.
It is becoming more difficult to anticipate the occurrence of an event as a result of the inherent difficulties in precisely anticipating the date and length of the event.
Investing in Recession-Resilient Sectors
Which kind of investments for high net worth individuals do well even when the market is performing poorly? Take into account the fundamental requirements of consumers, which are the same regardless of the state of the market.
During times of economic weakness, certain areas of the economy often show signs of robust performance. Investing in these industries is how high net worth individuals are riding out the bear market.
In spite of the fact that inflation is at a high level, people will always have a need for vital products and services such as food, fuel, and medical care.
As a consequence of this, the assets that are part of industries such as consumer staples and utilities often have a greater degree of resilience during periods of decreasing market circumstances, which are also referred to as bear markets.
Investing in certain industries may be accomplished via the use of exchange-traded funds (ETFs) or index funds, both of which are intended to replicate the results of a specific market benchmark.
A good instance of this idea is the practice of investing money in an exchange-traded fund (ETF) that specializes in consumer staples. Such a fund gives investors the opportunity to acquire exposure to companies that are active in the consumer staples industry.
When the economy is in a downturn, this specific industry is recognized for having a greater degree of stability than most others.
When opposed to investing in a single company, purchasing shares in an index fund or exchange-traded fund (ETF) allows for a larger degree of diversification. This is due to the fact that these funds often possess shares in a number of different companies.
Optimizing Tax-Loss Harvesting
Tax loss harvesting is a strategy that may be used by taxpayers who have a high net worth to reduce their overall tax liability. It is how high net worth individuals are riding out the bear market.
This strategy entails investors selling off assets that are not meeting their expectations and, as a result, suffering losses.
These losses are then used to offset any gains that have been realized as a result of the strategy. Through the use of this strategy, they are able to lower their total tax burden related to capital gains.
Taking advantage of opportunities to record tax losses might be one of the least complicated ways to make cash in the current economic climate.
As an example, it is possible to sell all of one’s holdings in an S&P 500 index fund that was issued by a certain company and then buy a similar fund that was issued by a different organization.
There is a possibility that the value of almost all investments made over the course of the previous year has decreased, which may have resulted in an unrealized loss.
A review of one’s investment portfolio and implementation of tax-planning methods are two things that should be done at the present time since the conditions are favorable for doing so.
There is a possibility that this approach will not work for everyone. It is not a good idea to renounce potentially profitable opportunities, such as those brought about by tax reductions, in order to avoid losing out on anything.
Before taking this step, it is highly recommended to consult with a financial expert to get some insight and direction.
Focus on the Long-Term Plan
Bear markets provide an arduous situation that tests the tenacity of all investors and put them in a difficult position.
Despite the fact that weathering difficult conditions may be difficult work, there is historical evidence to show that the market has a tendency to bounce back relatively rapidly. Focusing on the long-term is how high net worth individuals are riding out the bear market.
When a high net worth individual plans to invest their money with a long-term goal in mind, such as saving for retirement, the beneficial effect of bull markets will far exceed the negative impact that bear markets may have on an investor’s portfolio.
It is not a good idea to invest money that is meant for short-term goals, which are typically goals with a time horizon of less than five years, in the stock market since doing so is not a prudent financial decision.
However, keeping the discipline to stop selling assets during downturns in the market may be difficult, but it is regarded as a highly advantageous technique for maximizing the performance of a portfolio
In the event of a bear market, investors who find it difficult to refrain from actively managing their assets may choose to enlist the services of either a robo-advisor or a financial adviser, who can take on the responsibility of supervising their investment portfolio during both favorable and unfavorable market conditions.
Those who are unable to refrain from actively managing their assets may find it difficult to refrain from actively managing their assets.
Converting to a Roth IRA
Converting a standard Individual Retirement Account (IRA) into a Roth IRA is a strategy that is occasionally considered by persons who have significant financial resources when the economy is in a downturn.
This is because a Roth IRA offers tax advantages. This procedure comprises transferring either all of the assets that are currently held in an existing normal Individual Retirement Account (IRA) or a part of those funds into a Roth IRA. The transfer may take place in either direction.
Roth conversion is how high net worth individuals are riding out the bear market.
The current time period provides a beneficial opportunity due to the lower tax repercussions associated with selling assets in the middle of a fall in account balances, which may not be as favorable in future time periods as they are in the current time period.
Additionally, going future, any earnings that have already been made are not subject to taxes under any circumstances.
Because there is no one answer that is ideal for all people, converting to a Roth IRA requires taking a multidimensional approach.
This is due to the fact that there is no universally applicable solution that is the best option. A wise plan of action would be to consult with a financial advisor by having a conversation with them.
It is important to examine one’s financial situation from the following point of view: Does one now fall into a lower tax band in comparison to what one may possibly be in the future?
When compared to how much they were worth around half a year ago, the value of the assets in your traditional Individual Retirement Account (IRA) has decreased.
The above remark might be construed as having similar growth outcomes but also experiencing decreased tax consequences in the here and now.
Those individuals who have children or descendants and would want to have some of their assets passed down to those children or descendants may find this specific strategy to be quite appealing.
Roth individual retirement accounts (IRAs), on the other hand, do not impose any such obligations on account holders, in contrast to traditional IRAs, which compel account holders to begin taking minimum withdrawals beginning at the age of 72.
If one includes legacy planning as part of their financial strategy, they may decide to prioritize the conversion process to a larger degree.
There is a possibility that one may inherit a Roth IRA, which would allow for an extension of the time during which the assets included in the account could grow tax-free.
Final Thoughts
A bear market is so-called because it often involves a period of falling stock values and a generally gloomy market attitude.
It is a time that requires resiliency and caution since it is typically not favorable for conducting excessive or high-risk ventures. As a result, it is a period that calls for resiliency and prudence.
This remark is accurate not just with regard to the risk that is involved with selling all of one’s stocks but also with regard to the risk that is associated with completely investing one’s capital in equity.
Diversifying one’s investment portfolio and putting more of a focus on firms that have strong, well-capitalized balance sheets rather than depending on speculative trends are two strategies that have the potential to provide considerable returns, even in the event that the market is falling.
Pained by financial indecision?
Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.
