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How to Recession-Proof a High-Net-Worth Portfolio

How to Recession-Proof a High-Net-Worth Portfolio

February 20, 2023

When the stock market is volatile and the economy seems headed for a recession, many ultra-high-net-worth investors might find it difficult to feel secure about their investments. Fortunately, there are strategies available to help these individuals recession-proof their portfolios and attain stability despite an uncertain economic climate. In this article, we'll explore several of the common tactics successful investors use to protect themselves against major losses due to recessions and other financial shocks.

3 Strategies to Safeguard Portfolios During a Recession

Instead of always viewing recessions in a negative light, ultra-wealthy investors should look for opportunities in the economic turmoil. For instance, this is likely a good time to rebalance allocations and invest in high-quality stocks at attractive valuations. Below are three additional ways individuals can take advantage of a recession:

  1. Harvest tax losses in a bear market – In the earlier stages of a recession, the stock market typically falls because of negative sentiment around lackluster company earnings. This can be the perfect time to benefit from tax-loss harvesting. The losses taken can be used to offset future capital gains, thereby potentially reducing one’s tax obligations.

It’s especially advantageous to implement this strategy if an investor has recently experienced a liquidity event and will owe a large amount in federal tax the next year. Before employing this strategy, however, individuals should first check with a tax professional.

  1. Diversify risk with alternative investments – A recession provides an excellent set of circumstances to manage risk by purchasing alternative investments. A financial asset that doesn’t fit into conventional categories (like equity, income, and cash), alternative investments include hedge funds, private equity/venture capital, commodities, property, and tangible assets. Adding these kinds of investments to a portfolio can help diversify it. Moreover, alternative investments can add value to a portfolio, and potentially serve to stabilize it, because they are generally less correlated to the equity and bond markets.
  2. Create or update a financial plan – Recessions should also spur ultra-high-net-worth individuals to develop a solid financial plan (or update their existing one), if they don’t already have one in place. While there are many benefits to these plans, being able to stress test one’s financial situation in different scenarios like a market downturn, high inflation, or recessionary environment is particularly helpful. In-depth analysis and planning with the assistance of a trusted financial advisor will help ensure the investor is on the right track no matter the state of the economy.

In conclusion, ultra-wealthy individuals must consider various strategies to recession-proof their portfolios. These can include harvesting tax losses in a bear market, diversifying risk with alternative investments, and creating a financial plan. Each of these methods can play a role in protecting an investor's assets during economic instability and helping them realize their long-term financial goals.

It's essential, however, that every strategy be discussed with a qualified professional prior to implementation. By working with a financial or tax advisor and being proactive, ultra-wealthy investors will be better prepared for whatever economic conditions may arise down the line.