Wealth Preservation for Millionaires and Billionaires Still Rules The Day!

Tuesday, June 11, 2013

In one of my recent appearances on CNBC with Maria Bartiromo we discussed whether the wealthy were sitting in cash instead of putting it to work in the equities market.

A recent trust company’s survey—polled people worth $3 million or more (one-third of respondents had $10 million or more)—and it showed that 88 percent of respondents feel financially secure today and 70 percent feel confident about their financial security in the future.  The survey found that 56 percent have a “substantial” amount of cash. Only 16 percent of them plan to invest that cash in the next couple of months. And only 40 percent plan to invest it over the next two years.

My clients understand when they lose money. These millionaires have enough money to afford to miss participating in the market when it becomes frothy and not feel guilty about their cash positions.

It’s not unusual to receive calls on bad days from my clients – with the question – “how much did I lose today”? It’s rare when I receive calls asking – “how much did I make today”?

I am the one making the calls to my clients on the bad and good days of the market. Unlike many advisors – during the tech bubble and recent sub-prime mortgage meltdown, I didn’t hide under the covers when it came to having frank discussions about gains and losses in the market downturn. I returned my client’s calls.

Unless you hung-in-there in the late fall of 2008 and rode the equities market up to recoup your losses, the behavioral bias toward loss aversion caused investors to go to sleep and wake-up  most days reflecting on the red arrows. It suggests the more frequently investors evaluate their portfolios, the more often they see losses, which may have prompted a move to less risky assets such as cash and bonds to begin with.

Since 2008, headline risk associated with market declines has prompted more frequent evaluations, but this psychological effect may be waning as volatility falls.

Real Return: Seeking Protection against Inflation

Cash has rarely exceeded the rate of inflation over the long run. Other investments with hard-asset or income-adjusting characteristics have offered inflation protection.  Combining them into a real return composite may increase the frequency of outpacing inflation.

Other reasons why high net worth investors are comfortable sitting in cash include the following:

  • They feel better being liquid.
  • They’re not confident given how long the market has been positive. As I blog, we’re enjoying a really productive and extended rally as we head into Memorial Day weekend 2013.
  • Preservation is better for them than kicking themselves for getting in at the wrong time.
  • Millionaires, Billionaires and their portfolio managers are waiting for valuations to come down so they can buy at lower valuations.
  • Wealthy prefer not to make mistakes and can afford to miss a little bit of a secular bull rally and what may now be actually a tentative rally as we wait to see if Bernanke and Company begin to taper their QE programs.
  • Investors don’t want to “time the market” to the downside and prefer to manage their risk to the downside. Also, it keeps their options open as investment options develop.

This is unless, of course, the wealthy start putting that money into the market.