How Smart Investors Invest in a Falling Market

After riding high on the bull since June of 2009, the Stock Market showed some serious kinks in the armor last week when the Dow dove more than 3,600 points on Coronavirus fears. 

As with panic attacks and crises that move the Stock Market needle, the pandemic fears proved to be more bark than bite as the Coronavirus has had a minimal real economic effect on the U.S. economy.

What the Coronavirus did was expose the market's vulnerability to an inevitable bear market.

The economy is in the midst of the longest expansion in history, which will reach 11 years this June if it continues. Between 1854 and 2009, the average expansion lasted 38.7 months. That's just a bit over three years. We're approaching nearly eight years over the average with the latest expansion. 

A bear market is not only inevitable but probably on our doorsteps, and investors inherently know this reflecting in their jitteriness in the face of the Coronavirus or any other perceived crisis such as the threat of war, natural disasters, geopolitical strife, etc.

With the potential for a falling market, have you noticed the pundits coming out of the woodworks to impart advice on preparing for a bear market? 

The problem with much of this advice is that many of the strategies promoted are merely defensive and don't offer any takes on not just how to survive during a bear market but to prosper.  

Common defensive strategies touted by so-called experts include shedding stocks for cash, government bonds, and fixed income assets like CDs to preserve capital. Some pundits even suggest employing a defensive stock strategy that involves investing in larger companies with strong balance sheets and a long operational history.

The thinking is that these more significant, more stable companies tend to be less affected by an overall downturn in the economy or stock market, making their share prices less susceptible to a more significant fall. 

It doesn't seem like a great strategy to me. It's like saying if the house is on fire, go to a room where the fire hasn't reached yet and hope the fire gets put out before it reaches you. No defensive strategy would have saved any portfolio during the last Financial Crisis. The whole house burned down. Why take the risk?

Smart ultra-wealthy investors don't rely on defensive strategies in a falling market or any market for that matter. That's because they are always playing offense. 

The one adjustment they do make is to hoard cash in a falling market, but it's not for the reason the so-called experts suggest for hoarding cash. The smart investors don't do it to preserve capital; they do it to go bargain shopping for the assets more in their wheelhouse - cash flowing alternative assets.

The truth is smart investors were unfazed by the Dow's 3,600 point drop last week. That's because they had already been preparing for a falling market. 

Back in March of 2019, UBS Global Family Office Report published a report where 55 percent of wealthy families surveyed - worth an average of $1.2 billion each - think the U.S. will slide into a recession within the next year. 

To prepare, they were hoarding cash and beefing up their already outsized allocations to alternative investments, which typically account for more than 80% of these investors' portfolios to begin.

Not all alternative assets are created equal, and smart investors are very selective about where they put their money - with a predisposition for tangible assets and productive businesses that offer consistent cash flow along with appreciation. 

Mature cash flowing businesses, commercial real estate, productive energy assets, and profitable agricultural holdings all fit this category of alternative investment that the smart investors gravitate towards.

Why do the ultra-wealthy favor productive, tangible assets like commercial real estate over any other investment class? 

Because commercial real estate provides certainty in a world of uncertainty, and the ultra-wealthy thrive on certainty. They don't speculate and leave their fortunes to chance, which is exactly what investing in the stock market entails. They play offense, not a defense in a falling market. 

The ultra-wealthy and institutional investors like university endowments have long favored commercial real estate for a variety of reasons. Commercial real estate has a proven and established history of profitability - providing the highest risk-adjusted returns of any investment asset class over time. - that offers cash flow, appreciation, and security other assets can't provide. 

With its low correlation to Wall Street and the broader markets, commercial real estate is an ideal asset for building wealth and for insulating against the effects of a falling market. 

Also, commercial real estate lends itself to diversification on several levels, including diversification by geographic location, asset class, compensation structure, and hold period. Investments spread across the country and the world in various recession-proof asset classes with a mix of compensation structures and hold periods ensures uninterrupted cash flow in a falling market.  

Smart investors are ultra-wealthy for a reason. They understand the power of leverage.

Instead of being a jack of all trades and master of none, they defer to the masters of various private funds with expertise in particular asset classes and geographic locations that no one person or fund could hope to acquire on their own.  

Passive investing through private investment funds allow smart investors to trade money for time - a far more valuable commodity than any other to the wealthy. 

Passive investing will enable them to leverage investment capital across a variety of funds to be able to diversify on truly impressive levels.  

In a falling market, follow the cue of smart investors who are always prepared for any environment by investing in tangible, cash flowing alternative assets that offer appreciation and security - all uncorrelated to Wall Street. 

Don't wait to take defensive measures to preserve cash in a bear market, go on the offense now to generate an income stream that will survive the next retraction. 

It's not too late to allocate your investment portfolio away from the volatility and uncertainty of Wall Street to an alternative asset class like commercial real estate.

Scott