Over the last 20 years, we have been through at least three significant market crashes – the dotcom bubble in 2001; the global financial crisis in 2007-09; and, most recently, the Covid-19 pandemic.
Protecting family wealth during periods of extreme market turbulence requires patience and preparation – fighting the urge to panic and sell investments prematurely.
Markets recover in time, but the key to riding out periods of volatility is to make sure you have a well-diversified portfolio. A portfolio entirely made up of stocks, for example, would not perform well when the stock market crashes. Between 2 January 2020 and 23 March 2020 when the Covid-19 pandemic took hold and the UK went into strict lockdown, the FTSE All Share index plummeted 35%*. The FTSE 100 index saw close to £130 billion wiped off on 9 March 2020 as company share prices plummeted.
The market has since bounced back and just over a year later the FTSE 100 hit record highs, proving that a buy-and-hold strategy for long-term wealth portfolios can work. However, holding other assets alongside stocks would have made this ride much smoother for your portfolio. For example, a diversified bond portfolio can provide a less volatile source of both growth and income.
Large-scale market crashes aside, there are other things that can cause unsettled markets or impact certain assets in a negative way. Inflation is one example of this.
Holding a portion of assets that can protect your wealth against inflation is often advised, as is ensuring you have a good geographical split. While stocks can be a good asset to hold against inflation, property or infrastructure assets can provide exposure to inflation-linked uplifts in income.
Little and often
Having a well-diversified portfolio is a great start, but there are other things you can do to help maintain, or even boost, your family wealth during times of turbulence. Drip-feeding regular investments into the markets, rather than sitting on a lump of cash and waiting for the best time to invest, can help ride out the volatile periods.
Known as pound-cost averaging, the argument for this approach is that you won’t be entering the market at one level. Investing in regular, smaller amounts means you are buying in at multiple price points that can help smooth out those bumpy periods over the long term.
The counter argument is that by doing this you potentially miss out on great gains. However, timing the market is inherently difficult, and while you could get lucky and invest when it is firmly on its knees, it is more likely that you will miss the bottom. That said, you could invest when the market is on its way up and still make a significant return with a buy and hold strategy.
Stick to the plan
When putting together your portfolio, a good wealth manager will make it a priority to fully understand your attitude to risk and long-term financial goals, as well as any other influences on how you would like them to invest.
This will dictate how your portfolio is split in terms of assets, geography and the period of investment. While in your younger years you may have an ‘all in’ attitude and go heavy on stocks, your wealth manager will likely shift your assets as you get closer to retirement to provide more protection.
It is this groundwork that will see your portfolio through the dark days of extreme turbulence and protect your wealth from being eroded.
*https://ifs.org.uk/publications/14773
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