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How the Wealthy Prepare for Recessions

The economy is roaring with the stock market at all-time highs, but we all know it can’t go on forever.

Recessions are a fact of life – not a matter of if but when.

Economies expand when businesses and consumers with money and confidence increase spending – businesses increase spending on equipment, staff, office space, inventory, and consumers increase spending on goods.

At some point, businesses will not need more equipment, inventory or employees and consumers will not need more TV’s, cars, etc. and the economy recedes.

Recent recession bellwethers haven’t helped to allay recession fears of the ultra-wealthy.

The inversion-yield curve has historically been a reliable indicator of an oncoming recession. It’s when short-term bonds pay more than long-term bonds. A rare occurrence, the inversion-yield curve has occurred TWICE in the past seven months – once in August of last year and again recently in February of this year.

The ultra-wealthy aren’t waiting for “you know what” to hit the fan. They’re preparing now for a recession because the latest economic expansion that started in June 2009 has been going 10 ½ years strong now (the longest in history) and is bound to end – likely sooner than later.

According to the recent UBS Global Family Office Report, 55 percent of wealthy families surveyed – worth an average of $1.2 billion – think the U.S. will slide into a recession within the next year. Half of these families say they’re hoarding cash, and the other half are shifting their investment strategies.

Ultra-wealthy investors and institutional investors have a knack for sensing economic disasters before they strike, so it might be beneficial to pay attention to what they’re doing.

So what exactly are they doing?

The most significant move wealthy investors are making is that they are divesting themselves of public equities.

To brace for possible economic disaster, they are:

  • Avoiding short-term market volatility by shedding public stocks; and
  • Re-allocating to alternative assets with a long-term outlook of 10 to 15 years.

They’re interested in assets with long-term growth that provide consistent cash flow – ideally backed by hard assets. Many are interested in commercial real estate, productive businesses, and, surprisingly, cannabis – specifically in the real estate side of cannabis.

The wealthy are re-allocating their investment assets towards recession-resistant businesses and assets like dollar stores and certain classes of commercial real estate.

Although there are segments of commercial real estate like retail and office that are affected by economic downturns, there are other segments that thrive in downturns, and this segment is affordable housing.

We know that the wealthy are pivoting towards a more long-term investment strategy, but why are they hoarding cash?

That’s because they want to go bargain hunting when disaster strikes. So when other investors start shedding assets, the wealthy will be there to snap them up with a keen interest in recession-resistant, income-producing assets.

Although the wealthy are adjusting their investment strategies in anticipation of a recession, the truth is they’re always prepared.

Instead of heavy investment in Wall Street volatility, the wealthy are heavily allocated to illiquid recession-resistant alternative assets like productive businesses, commercial real estate, farms, etc..

The Yale Model, named for the Yale Endowment investment strategy, is heavily invested in the types of recession-resistant alternative investments wealthy investors prefer.

For example, commercial real estate is consistently at the top of Yale’s priorities, with an allocation consistently above 12%. Commercial real estate offers far superior returns while protecting against downturns since alternatives have a low correlation to the broader markets.

There’s proof that this alternative-heavy strategy is recession-resistant.

For example, in 2018, while the S&P was down 4.38%, the Yale Endowment reported a return of 12.3%.

The wealthy prepare for recessions by pivoting to more recession-resistant assets and hoard cash to go bargain hunting when the storm hits.

It’s no surprise that as we edge closer to another recession, the super-rich are shedding equities and turning to more income-generating alternatives.

Don’t wait for disaster to strike to consider income-producing alternative investments.

The wealthy are always heavily allocated in these assets. They’re just increasing their holdings in these types of assets as we get closer to the next recession.

Mike Foley

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