The world economy is already on shaky ground. The war in Israel will only complicate matters. “The global economy is limping along, not sprinting,” said International Monetary Fund chief economist Pierre-Olivier Gourinchas said at a joint meeting of the IMF and the World Bank in Morocco this week. At the same meeting, when asked to comment on the conflict, World Bank President Ajay Banga told Reuters, “It’s a humanitarian tragedy and it’s an economic shock we don’t need.”
The economic shocks from the start of the conflict in Israel were immediate as the price of oil jumped by as much as five dollars per barrel and both the futures and equities markets fell. Nobody is sure of the long-term effects of the war but whenever the price of oil is involved, shockwaves will be felt throughout almost every sector of the world and, the U.S. economy.
If the conflict widens and brings in other parties, the global economic effects could even be more widespread. “If this expands and brings in other parties, then the outlook is for even a weaker global economy, even more inflationary pressures. And the markets are going to be finding it hard to deal with that,” renowned economist Mohamed El-Erian told the financial news channel CNBC.
In the past few years, it seems like there’s been one threat after another that has come along to shake up the markets and the economy – pandemic, inflation, war, oil prices, supply constraints, and now the war in Israel. Portfolios are constantly under threat along with the retirements that depend on these portfolios.
Not all portfolios are under the threat of a worldwide economic meltdown due to war or other crises.
Ultra-high-net-worth investors (UHNWIs) are less exposed to the types of threats like war because their portfolios are different from the portfolios of the average investor. Instead of allocating to traditional assets like stocks and bonds that are highly correlated to the broader markets that, in turn, are correlated to world events, the wealthy allocate to non-correlated assets.
Before diving into the type of non-correlated assets that insulate UHNWI portfolios from market volatility, let’s first examine what sets UHNWIs apart from mainstream investors in terms of investing objectives.
Once you understand their investing objectives, you’ll understand why they allocate assets non-correlated to the broader markets.
UHNWIs Invest for Income.
The mainstream investor speculates. The average investor allocates to stocks because they’re chasing gains. They’re looking to buy low and sell high. This rarely works consistently because losses usually outpace gains – just like in Vegas. The wealthy don’t speculate. They invest for cash flow and income. That’s why they allocate to assets that can generate consistent and reliable income.
The wealthy seek income for two reasons: 1) cash flow can be reinvested to compound and grow wealth and 2) for security, where passive income can compensate for loss of work income during downturns. So, even as companies struggle in the face of economic downturns and jobs are jeopardized, passive cash flow can act as a security blanket in those difficult times.
The Wealthy Think Long-Term.
The mainstream investor thinks short-term. The wealthy think long-term. They’re investing not just for their own lifetimes but for future generations as well. That’s why they don’t speculate. It’s also reflected in their lifestyles. They don’t spend money on frivolous assets or things. They would rather put that money to good use to make more money to ensure the future of their heirs and their heirs.
When the wealthy invest, they turn to long-term assets, assets that generate reliable cash flow and appreciate over time. Long-term assets combining the benefits of both income and appreciation have the ability to accelerate wealth like no other assets.
The Wealthy Gravitate Towards Tangible Assets.
The mainstream investor will invest in assets with no underlying value. The mainstream investor will invest in anything – literally in assets with no underlying value. Think meme stocks, NFTs, and crypto. The prices of these investments have nothing to do with underlying value and are determined entirely by what investors are willing to pay for them. The market for intangible assets are driven by emotions and their prices reflect this volatility.
The wealthy prefer hard assets that have an underlying value that is independent of what the public is willing to pay for them. Even if an investment goes south, the underlying asset can still be sold to recover losses because it has underlying value. The same cannot be said of NFTs and crypto.
Now that you understand the investment objectives of the wealthy, you’ll understand why they have always had a preference for cash-flowing hard assets like commercial real estate and investments in productive private companies. Not only are these assets non-correlated to the broader markets and world events, but they are built to withstand economic shocks – especially assets deemed essential like shelter, food and energy that will always be in demand.
So, while the rest of the investing public holds its breath in anticipation of the fallout from the war in Israel, protect your portfolio now by allocating to non-correlated assets like commercial real estate and private investments.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.