Investment Strategies A High Net Worth Advisor Uses To Lower Risk

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Are you wondering what investment strategies you can use to lower your risk while increasing your returns? In this post, I’ll share five investment strategies that one of the top financial advisors uses to build wealth safely for his clients while also generating income.

Many years ago, my dad taught me to investigate where and how the most successful fund and wealth managers are investing to get valuable investing ideas. There are several ways to accomplish this, but one easy way is to read interviews with top financial advisors.

In this process, I search for financial advisors that use investment strategies beyond the standard asset allocation into large institutional stock and bond index funds. I sure found that in a recent Barron’s article interviewing Andrew Schultz!

Investment Strategies Used for High Net Worth Investors

This highly successful financial advisor manages $1.1 billion dollars in the Private Banking and Investment Group at Morgan Stanley. The typical account size is a hefty $10 million.

In this post, you’ll see the exact strategy this high net worth advisor uses for his wealthy clients.

Note that the article was published April 30, 2018. My assumption is that this is not a short term strategy, but it may be adapted as markets change over time.

It’s refreshing to find a wealth manager that is willing to go beyond traditional investment strategies in long term buy and hold investing. It’s also refreshing to discover an expert who is willing to share those stellar investment strategies with us everyday investors. While these are certainly not recommendations by anyone, they lay the ground for further research for smart investors seeking ideas for how to build wealth.

As of the time of the interview, Schultz put half of his client’s money into alternative investments. This is a rarity. He makes the following points for his portfolio strategy:

  • Traditional fixed income investing strategies don’t give enough returns.
  • “Overweighting” in stocks causes too much risk.
  • Stocks and bonds go down together during many periods, such as 2008.

(If this sounds familiar, you may have read it here or seen these same concerns in one of my videos!)

Five Investment Strategies That Lower Risk

Schultz invests in five alternative investment strategies. He was allocating 20% (of the 50% in alternative investment strategies) into each of these categories:

  • Long-short equity – This investment strategy buys stocks that are expected to fall and sells stocks expected to drop in value. This requires short selling of stocks, as well as buying stocks long.
  • Tactical equity funds – These funds move money from one asset class to another with the goal of quick gains. This investment strategy makes tactical moves based on what is happening from an economic, political and global perspective.
  • Opportunistic/distressed debt – This investment strategy buys low quality bonds or other debt instruments that are selling cheap.
  • Absolute-return/market neutral investing – This investment strategy seeks consistent returns even when markets are moving up and down.
  • Commodities/managed futures investing – With this investment strategy, contracts tied to commodities such as gold, oil, and agriculture are purchased. These futures contracts frequently don’t move in the same direction as stocks and bonds. This creates a protective hedge.

While Schultz wouldn’t reveal the funds he likes, Barron’s provided the following funds as possible options for investors:

  • AQR Long Short Equity – QLEIX
  • Sector Rotation – NAVFX

(Note that I have not researched these funds. While I am not using any of these investment strategies right now, I have used several of them in the past.)

Schultz had only 20% of his clients’ money in more traditional stock investment allocated both in the US and abroad.  He had 30% invested in bonds, divided between municipal bonds and corporate bonds.

As you can see, there is a lot of strategy to reduce risk in his client’s portfolios. I also notice income potential from the bond portions of the portfolio. Many retirees and affluent investors desire portfolio income enhancing the strategy even more. Note that high risk debt would be very high yielding (over the Muni bonds). This can be very beneficial for retirement income planning.

Practical Insights for Wise Investing

While these investment strategies may be too complex for most individual investors, there a is a lot to gain here.

♦ Out of the box wealth managers do exist.

Don’t think that you could never have access to a financial advisor that is this strategic. Strategic financial advisors are not necessarily managing huge amounts of wealth. In fact, smaller, more boutique wealth managers and advisors can often implement more alternative investment strategies easier because they are nimble.

Strategic advisors with less assets under management are more accessible to investors with less capital, at least initially. As their success spreads, they get bigger. I’ve seen this happen time and time again with funds and with financial advisors. Often, their performance can (but not always) suffer from their eventual enormity as they have to adapt their investment strategy for their size.

♦ It is always smart to protect your investments from risk.

Investment risk may come stock market cycles, or from economic factors such as interest rates. There is also political risk, to name only a few investment risks.

Allocating your money between stocks and bonds is not the only way to reduce your investment risk, as you can see here. Most of my experience is in risk lowering diversification from investing in real estate, small business and income producing assets like MLP’s or REIT’s. I love seeing these more passive investment strategies that reduce risk.

♦ Proactive investing that limits your downside is a skill. Some risk management strategies are easier to implement than others.

How Investors Can Implement Similar Investment Strategies

There are several ways to utilize investment strategies similar to the ones Schultz’ constructs for his clients.

First, you can learn the skills required for the various investment strategies. The depth of expertise required to implement this in full seems daunting to me.

Second, you can invest in funds that allow you to invest more strategically than long term buy and hold investing. If you’re not an accredited investor, you may run up against some limitations in finding truly alternative funds like these.

The article states that Schultz uses some hedge funds, which are limited to accredited investors. You can always research the funds above suggested in the article. Having said that, more and more alternative funds surface every year.

Third, you can hire a financial advisor. By knowing that investment strategies like this exist, you know what’s possible, and what to ask any advisor you are considering hiring.

Be forewarned that all of these investment strategies and risk management tools won’t come without a cost. Fees can be high for such funds, but with valid reasons. Fees are higher because these funds offer something that is more unique. They also require more work by the fund managers and fund providers.

Plus, short term gains from some of these investment strategies can trigger taxes. Commissions are also a part of more frequent trades. There’s a trade off, but it may be worth it. Only you can decide what is best for you based on your capital, age, risk tolerance, and goals.

Simple Investment Strategies I Use to Lower Risk

While admittedly, the investment strategies above are too complex for most investors, there are simpler ways to lower risk in your portfolio. Here are a few simple risk management strategies I have done or am doing now.

  • Rotating from overvalued stocks to undervalued stocks.
  • Being aware of the overall cycles in different types of investments, such as stocks, bonds and real estate.
  • Buying defensive investments that do well in the later cycles of economic expansion. This usually includes utilities, real estate investment trusts (REITs), materials, energy, and staples. Think of what everyone needs regardless of what the stock market is doing, such as toothpaste and electricity.
  • While most stocks move up or down with the overall market, higher yielding, high quality stocks tend to hold up better during bear markets.
  • Consider non correlated alternative investment strategies that are available to most investors, such as real estate rentals. Since many people delay buying a home during recessions, rental demand can actually increase during hard times.
  • Treasury bonds tend to move opposite the stock market since investors flock to safety during uncertainty. This is the traditional, no frills way to lower portfolio risk.
  • Finally, simply investing in what is cheap can be an excellent risk management strategy. By doing so, you’re naturally less likely to incur losses.

Now you have several ideas for investment strategies that can help keep your retirement account safer while allowing wealth accumulation. Again, it’s up to you to be aware of your investment risk, and take action to keep your money safe. No one cares about your money more than you do.







Watch This Video Below on “Investment Strategies That Lower Risk”

The information on this website is for education only and is not to be construed as personal financial advice.