The dramas of 2020 haven't been followed by a period of calm this year. Quite the reverse. So what should wealth advisors do and how should they help HNW and UHNW individuals frame their decision-making?

With so much turmoil and headline-making stories, it’s at times tough for advisors to keep their clients’ feet on the ground. Yesterday, for example, cryptocurrency trading platform Coinbase held its initial public offering and it fetched a market valuation of $85 billion. The GameStop episode earlier this year (see a commentary here), or the surge in IPOs of Special Purpose Acquisition Companies (see an article here), speak to strong equity market sentiment - but possibly not all based on solid fundamentals. What to make of all this from a wealth management angle?

Blu Family Office, the European organisation, takes a look at these questions and more. The insights come from Christian Armbruester, chief investment officer and one of Blu’s founders. The editors are pleased to share these insights and welcome responses. The usual editorial disclaimers apply; to jump into the debate, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

As if 2020 wasn’t strange enough, this year has literally started off with a bang. For the first time since the British sacked Washington in 1814, we had a mob storming the Capitol. Then there was Gamestop and the mother of all short squeezes, which resulted in some of the most fundamentally unsound companies reaching new highs. If that wasn’t enough, we also had the collapse of supply chain financing when Greensill imploded, and we saw the dangers of betting more than you have, when Archegos brought some of the biggest investment banks to their knees. All of that and we have barely made it out of the first quarter of 2021. What does it all mean, what awaits us for the rest of the year, and how are we to position ourselves as investors against all of these happenings?

Whenever there is a market crash, there are direct and indirect effects. Foremost, it was about the virus, the market sell-off and the utter panic of when we could expect things to get back to normal again. It is estimated that central banks have pumped more than $20 trillion into the global economy and they are far from done. Interest rates are at rock bottom and fiscal stimulus is just starting. These actions on an unprecedented scale have resulted in global equities not only recovering all of their losses but going on to make new record highs.

Whereas markets have gone up in a straight line, individual stocks, bonds and also commodities have been much more volatile. Historically, machines that trade systematically have used volatility to make money and bring things back in line. However, with people sitting at home with little else to do but trade stocks in their online brokerage account, things became very distorted. So much so that the machines got confused. Historical patterns simply don’t repeat themselves when you have 80 million people trading on rumours in Reddit chat forums. Hence, it has been the case that volatility has begot more volatility which makes it difficult to predict where things go from here. That is before we have taken into account so called “special situations” whereby money managers have been caught spectacularly wrong footed or committed fraud to cover up mistakes in risk management.

The only thing to do when things are utterly unpredictable is not to lean oneself too far out of the window and by that we mean: taking too much risk. It so happens that people have many different opinions when it comes to not only defining, but also quantifying risk. Probabilities, correlations, volatility and all the mesmerizing mathematics in the world can pretty much tell us whatever we want to know, but in this case, it really is a matter of keeping it simple. 

If Bill Hwang had come to you and asked to borrow eight times more than he had, would you not have thought that maybe he was taking too much risk before he lost $20 billion in a matter of hours? Moreover, if you had too much money tied up in things which would not allow you access to your money for a decade, would you not have thought about what were to happen if you needed a bit of cash for a (very) rainy day? And if someone promises you the trade of the century, yet you know the company was bankrupt, would you still buy the stock?

Rule number one, when it comes to investing is that if ever you find yourself thinking about that one trade that could make you rich or if it were to go wrong would put your entire fortune at risk, then you are probably doing something wrong. The name of the game is to keep playing the game. So forget the fancy risk models, ignore the definition of asset classes and for goodness’ sake, don’t listen to a salesman who gets paid no matter what you do. Spread your money across as many disparate things as possible and make sure you own at least twenty different investments. That is when you are truly diversified statistically, and it is about the only thing we know for certain, brave new world or not.