Financial turmoil prompts wealthy investors to seek cover in the form of “catastrophe portfolios”
By Scott Kyle
Over the last few months, economic calamity and popular uprisings across the globe have inspired uncertainty and fear in the hearts of millions. However, according to recent coverage on NPR, the unemployed and underpaid aren’t the only ones on the defensive in the face of an increasingly unstable economy. Up against risky stakes and surrounded by crumbling markets, the world’s wealthiest individuals and families are now seeking to secure their assets in what have come to be known as “catastrophe portfolios” – three-part aggregations consisting of “gold; blue-chip international companies; and bonds issued by developed nations.”
In addition to these portfolios, high net-worth investors are also favoring real estate purchases in an attempt to satisfy what some industry experts see as “a basic, highly unsophisticated urge” to accumulate “tangible things that are meant to have lasting value.” As Swiss banker Ivan Adamovich explained to the press, today’s turbulent markets require a switch in focus from making more money to retaining existing wealth. But are so-called “catastrophe portfolios” the best way to weather the global economic crisis?
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To be sure, commodities such as gold have a place in safety-oriented portfolios. However, it is important to remember that commodity prices can plunge on a dime: several years ago, the price of oil dropped from around $140 per barrel to a low of $35 per barrel, just when prominent investment banks were calling for a $200 per-barrel price. Similarly, gold’s recent drop of over 15% in a matter of months shows that even so-called “safe” havens can experience fast and dramatic price-shifts without warning. Thus, as with any investment, too much of any one thing can be risky — and gold should never represent more than a reasonable portion of anyone’s portfolio.
When it comes to bonds, the devil is in the details. Many top bond fund managers are betting that certain bonds (specifically long-term US treasuries) will actually drop in value, making critical selection paramount in terms of bond purchases. With interest rates at historic lows, bond prices are subject to large declines if and when inflation rears its ugly head (as many predict), thus causing interest rates to rise and many bond prices to fall. Under these circumstances, it is critical to work with an expert when crafting your portfolio, and to carefully select quality bonds that will provide true safety rather than putting hard-earned money at risk.
Finally, despite the dire political and macro-economic headlines, many large international companies are in their strongest financial positions in history. A well-diversified portfolio that includes investments with these companies can bring income in the form of dividends as well as capital appreciation potential over time. To further protect such portfolios from disaster scenarios, savvy professional investors are using instruments like put options to limit losses. At Coastwise Capital Group, we encourage investors to work closely with professionals who have deep experience in effectively using such sophisticated instruments. To learn more about Coastwise Capital Group and find resources on smart financial planning strategies, visit us online: www.coastwisegroup.com.
The information in this article is strictly for educational and illustrative purposes and is not an attempt to furnish personalized investment advice or services.
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