No one wants to watch their hard-earned savings evaporate in an instant just because the stock market took a dive.
If you’re a high-net-worth individual, a wealth manager can reduce the effect of market volatility on your portfolio, and your wealth.
Wealth managers are experts in market analysis and investment, and they know how to rotate your money into financial vehicles to escape volatility and limit the effects of a market crash on your portfolio. Sure, they might not be able to stop you from taking a loss, but they can certainly reduce the size of the drawdown.
Let’s take a closer look at how wealth managers protect your wealth against market downturns.
Understanding Market Risks
The stock market is a rollercoaster. Some days, business is thriving, and the next, everyone is talking about recessions, inflation, or global crises. Wealth managers take considerable time to analyze such risks.
They don’t simply react to market crashes; rather, they anticipate and prepare for events and have mechanisms in place to ensure stability. Think of them as fiscal sentinels—their function is to anticipate harm before it ever arrives.
The Power of Diversification
One of the oldest strategies in a wealth manager’s playbook is asset diversification and for a good reason. Imagine putting all of your savings in one stock, and the business goes under.
Imagine the horror as you open your portfolio and see a massive drawdown staring back at you.
That’s why wealth managers invest in different classes of assets. Instead of only adding stocks to your portfolio, they add the safety of bonds and hard assets like real estate and gold. They invest in different sectors of the market and rotate your investments when volatility strikes, ensuring your portfolio stays ahead of the game.
Smart Asset Allocation
Wealth managers do not invest blindly and wait for their investments to pan out. They use active asset-allocation strategies to balance between risk and reward. If the economy is in poor health, they’ll reposition their clients’ holdings by investing in safe securities like bonds or dividend stocks that aren’t subject to massive market volatility.
When things pick up, they might rotate back to growth stocks. The key is to never have the portfolio excessively exposed to excessive risk, but rather poised to seize opportunity in an upturn.
Hedging Against Market Downturns
Hedging is similar to an insurance policy for your investments. Wealth managers use several strategies to protect their portfolios against market crashes. They might invest in options to compensate for price swings and remove those hedges when they feel the volatility has passed.
Some will invest in gold or other commodities that are classic hedges against volatility in equities markets. Or they might invest in ETFs that track broader moves in the indexes, spreading risk.
The idea isn’t to avoid risk completely—that’s impossible—but to give your portfolio a cushion when things go south.
Making Tactical Adjustments
While long-term investing is standard practice, there might be times when short-term moves require the wealth manager to pay attention to the market and capitalize on trends. Wealth managers make tactical adjustments according to the ebb and flow of the markets.
If there’s uncertainty, they might shift allocations from stocks to bonds or move your portfolio into a cash position until they feel it’s safe to enter a position. If a sector is likely to take a hit, they might rotate your investments into better-performing sectors.
Why Alternative Investments Matter
Wealth managers regularly include alternative investments to bring stability to your portfolio. Private equity, property, venture capital, and hedge funds might offer great ways to balance your portfolio and reduce risk. These investments do not always rise and fall in perfect lockstep with the stock market, providing protection against losses if the market is in decline.
Managing Investor Sentiment
The mortal enemy of an investment portfolio is not a drop in the stock market—it’s investor emotions. As the market drops, investors, especially retail investors, panic and sell their holdings at the worst possible time.
Wealth managers ensure this doesn’t happen to you, keeping your focus on the long-term rather than the short-term panic in the markets. They remind clients that market drops are part of the natural business cycle and are usually transitory.
Instead of panicking and making rash decisions, clients are urged to hold their course, trusting in the historical data. Markets will bounce back and eventually reach new highs, and you’ll be positioned to take advantage of every tick in price action.
Preparing for Disaster: Using Stress Testing
Wealth managers expect the best but prepare for the worst. They use stress testing to examine how a portfolio may react in different economic scenarios like a financial meltdown or recession.
By running simulations, they identify weaknesses in an investment plan and take corrective steps before disaster strikes. This kind of forward-thinking means they don’t panic when the market crashes. They have their plan mapped out in advance.
Customizing Strategies for Diverse Investors
Not all investors have the same objectives and tolerance for risk. A client in their 30s who’s investing for the future might have more tolerance for risk, while someone who is closer to retirement needs stability.
Wealth managers adapt their investing strategies to the client’s personal needs. Younger investors might have greater exposure to high-growth stocks, while retirees might prefer the safety of dividend stocks or bonds.
By tailoring the portfolio to their client’s unique financial profiles, they keep their clients’ risk in check.
Staying Ahead through Continuous Monitoring
Markets change, and so do financial goals. Wealth managers don’t just set up a portfolio and forget about it. They constantly monitor investments, economic conditions, and financial news to make sure everything stays on track. If something in the economy shifts or if there’s an emerging threat, they adapt to protect their client’s interests. They also provide market updates and clarify any changes to their investing strategy.
Final Thoughts
Market downturns may be inevitable, but taking a massive drawdown is avoidable with the right investment strategy. By staying ahead of market moves and keeping clients’ emotions in check, they protect wealth, no matter what lies ahead for the market. If you’re serious about protecting your wealth against market volatility, speak to a wealth manager and ask them about the strategies they can use to manage and grow your portfolio.
