Where to Invest in a Bear Market

TruePoint Capital

Wow! What a week! The Dow shed 3,600 points this week on Coronavirus fears. Monday, Tuesday, and Thursday saw drops of 1,000 points or more.

This week consisting of unprecedented drops, was preceded by more than a year of record gains in a market that’s unprecedented not only for its highest of highs but now for its unpredictability.

What’s clear from the current market is its sensitivity to international news and events – both good and bad – and the overreaction in both positive and negative territory to this news.

Up to this week, we were in the midst of the longest bull market in history.

  • Could this be the beginning of a bear market?
  • Can you afford to wait?
  • Where should you invest in a bear market?

To answer the question of where you should invest in a bear market, look to the investing patterns of the investors who survived the last Financial Crisis and how they have planned for the next one.

In the last Financial Crisis, the investors who survived the downturn were those whose investments were not correlated to Wall Street (i.e., alternative investments) – mainly passive income investments that continued to provide investors with an income stream even amid a widespread recession.

There are certain passive investments in alternative assets such as productive businesses, agriculture, commodities, as well as specific segments of commercial real estate. In a recession, consumers still need shelter, food to eat, power for their homes and cars, etc.

Investors who not only survive but continue to thrive even in downturns are those who have achieved true financial independence through investment in the alternative asset class – whose income is not correlated to the broader markets.

Sophisticated, ultra-wealthy investors have been preparing for a bear market since the middle of last year. According to a UBS Global Family Office Report published in May of 2019, 55 percent of wealthy families surveyed – worth an average of $1.2 billion – predicted the U.S. would slide into a recession in 2020 and shifted their investment habits accordingly.

So, where did they and where do they continue to divert their investment assets?

They’re shedding their equity positions and re-allocating them to bulk up their already substantial allocations in alternative assets with a long-term outlook of 10 to 15 years. Commercial real estate is an example of this type of alternative investment with a long-term window.

But why the long-term window?

There is no better strategy for mitigating against volatility than investing in the long-term. 

Sophisticated investors understand that long-term investments like commercial real estate can deliver some of the best risk-adjusted returns of any asset class, but achieving those lofty results require patience.

Investing long-term allows the law of averages to play out. Being in an investment for too short a term can mean catching the brunt of a downturn without seeing the benefits of a rebound.

The ultra-wealthy have always been attracted to long-term investments for the host of advantages quick fix stocks can’t provide – chief among them is the consistent, reliable income that continues to flow even as the rest of the economy slows down.

Illiquid investments with long lockup periods prevent the type of irrational behavior and widespread panic driven by the 24-7 news cycle that plagues the public markets. This week has been a stark reminder of this market volatility and hypersensitivity to panic inducers like epidemics, terrorist attacks, natural disasters, socio-political conflict, etc.

Along with consistent cash flow, long-term growth and security are also crucial investment criteria sought by sophisticated investors.

Investments backed by a hard asset have less likelihood of a complete loss since the asset would have value at liquidation. Worthless stocks have no underlying value.

For direction on where to invest in the next bear market, take a cue from the investors who yawn at panic episodes like the one experienced on Wall Street this week.

The ultra-wealthy are always hedged against this type of volatility by being heavily allocated in illiquid non-correlated alternative assets. These assets include productive businesses, commercial real estate, agriculture, and commodities, etc. that continue to generate revenue even in the face of a widespread downturn that will exhibit long-term growth – all backed by tangible assets.

There’s proof that this alternative-heavy strategy is recession-resistant. For example, in 2018, while the S&P was down 4.38%, sophisticated institutional investors like the Yale Endowment reported double-digit returns.

It’s not too late to prepare for a bear market.

Don’t wait for disaster to strike to consider income-producing alternative investments like commercial real estate.