The markets have been decidedly more volatile in 2018. And it's not much fun...
But the real question is: What can an investor do about it?
In Part One of this series on volatility, we explore how changing the volatility profile of your portfolio by incorporating less conventional, longer term investments can change your exposure to short term market volatility.
IT'S ABOUT CHOOSING YOUR RISKS
Isn't volatility just a fact of life, as an investor?
Sure. But many of today's high net worth investors are taking on more short term volatility than they need to. By keeping all of their investments accessible for liquidation at any time, they are fully in the path of volatility. Even in IRAs, which remain inaccessible until we are in our 60's, most investors keep their portfolios ready to "go to cash" within a day.
For investors who can tolerate it, liquidity risk is an underutilized source of potential return and a means of adding stability over shorter and longer time periods. So, manage the types of risks in your portfolio to potentially improve your long term returns.
Picture an investor whose portfolio is fully exposed to volatility, She decides to take ten percent of her portfolio and "lock it up" in a vehicle that could reasonably earn her 7% per year. The caveat is that she couldn't touch it for ten years.
Assuming that she didn't need that portion of her portfolio to meet specific or possible cash needs, we're okay thus far.
Most investors would sleep better at night knowing that a specific portion of their money could potentially double in value in 10 years. And despite its lack of trading liquidity, I'd suggest that such an asset should have a place in many investment portfolios.
Many unconventional investments, from real estate partnerships to certain insurance contracts, have the prospect of competitive long term returns, but require the investor to sacrifice what is often an irrational need for 100% liquidity on all of their investments.
THE "ENDOWMENT MODEL"
We can take inspiration from those investors who have a practically infinite time horizon -- endowments and foundations. Their portfolios look nothing like those of the average investor, with large allocations to less liquid investment vehicles like private equity and real estate. They are aiming for capital growth that compounds over many years, and they have been pretty darned successful with this approach. Perhaps we can learn a bit from them.
Boardwalk has developed the Balanced Impact Strategy for those impact investors who wish to mimic some of the best endowment practices. This platform of vetted, impact investment vehicles can be used to create that "endowment-like" component of the portfolio - at more accessible minimum investment levels. Such investments, while surely not immune from potential losses, are focused on long term returns without the typical short term market volatility.
The modular approach of this strategy allows a high level of customization to each investor's unique goals and interests. From affordable housing to renewable energy. From sustainable food companies to clean tech to organic farmland. New strategies are being added monthly, giving investors more chances to personalize their long term impact portfolio while taking some assets out of the path of short term volatility.
Take a look at the Balanced Impact Strategy image below to learn more. Then, call or email us to discuss if this is a good choice for a part of your investment program.
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Regulatory note: Many investments mentioned here are accessible only to Accredited Investors who meet certain net worth or income criteria.