- Coronavirus fears have led to plunging markets over the last two weeks, resulting in a trading halt on Monday morning.
- Entrepreneurs and other well-to-do investors are focusing on building an “all-weather portfolio,” with hefty allocations toward cash.
- Holdings in commodities, including gold, have ticked up slightly.
If the coronavirus has you spooked, you're in good company. Even wealthy investors are building up their cash cushions.
Global markets haven taken a beating over the last two weeks, amid worries about COVID-19. The pain continued on Monday morning as the S&P 500 tumbled by more than 7% and trading was halted.
Recent market volatility and worries over supply chain disruption have also spurred concerns about an approaching recession.
Well-to-do investors are battening down the hatches, according to Michael Sonnenfeldt, chairman of TIGER 21, an investment club for high-net worth people.
"This is sort of a black swan event, and you couldn't have anticipated it even a month or two ago," Sonnenfeldt said.
"Most people who sold businesses and are in wealth preservation mode are focused on mitigating losses rather than getting some kind of huge advantage."
TIGER 21, an organization of about 770 people with at least $10 million to invest, stands for The Investment Group for Enhanced Results in the 21st Century.
""I would say that the real goal is what would be called an all-weather portfolio," Sonnenfeldt said. "One that can survive in the bad times and thrive in the good times.
"You do it through prudent diversification," he said.
Building a cash cushion
Members of TIGER 21 kept 12% of their portfolios invested in cash and other equivalents during the fourth quarter of 2019 — a position they had held for the entire year and the highest it's been since 2013.
By building a large cash buffer, investors have positioned themselves to endure financial turmoil for as long as four years without having to liquidate their investments, according to TIGER 21's fourth-quarter report.
They're also ready to snap up investments at lower prices.
Investors have also tiptoed into safer assets.
Fixed income allocations have ticked up slightly, hitting 10% in the fourth quarter. That's an increase from 9% in the third quarter of 2019.
"Preserving wealth starts with minimizing capital losses and not reaching for unrealistic returns," said Sonnenfeldt.
TIGER 21 members have also kept a 1% allocation in commodities — including gold — to help them offset stock risk, he said.
Not fleeing the market
Though members of TIGER 21 are positioning themselves more defensively, they're still willing to snap up an opportunity — if they've had the chance to kick the tires.
For instance, these investors ticked up their allocation toward private equity during the fourth quarter, such that they account for 24% of their holdings.
That's up a notch from 23% in the third quarter.
Rather than investing in massive private equity funds, high-net worth investors would prefer to directly invest in small companies where they can share their expertise or be actively involved in management, according to TIGER 21's report.
"If you've been building a business for 20 or 30 years, you could only have done so by being really good at managing the downside and having enough resources to cover the unexpected," said Sonnenfeldt. "That's different from how most people invest."
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Since most of TIGER 21's membership built their wealth in real estate, the sector continues to make up the greatest share of their portfolio: 28% of their allocation.
That's down from 29% in the third quarter.
Public equity continues to hold steady, accounting for 21% of investors' holdings.
"Members have an abiding faith in real estate and long-term businesses, but even in this market, coronavirus has had a devastating effect," said Sonnenfeldt.