Independent Thinking^®

Readiness & Recovery

Resilience, or the grace and power to recover, is by many accounts the single most important quality in aging prosperously and well.

As we get older, we start to see the core of resilience is what resilience gerontologists – these are the people that study resiliency in the elderly – and one of our recent speakers, futurist Andrew Zolli, called narrative openness.
 
That means understanding that our story is not over; that we are still the protagonists of our own novel and that there still may be twists and turns in the plot. In short, it’s a heck of a lot easier to land on our feet if we are prepared for a fall.
 
Investors able to bounce back from the Great Recession had generally maintained a balanced asset allocation that allowed them to maintain their lifestyle as they waited for the market to recover. Some fell harder, including those who had invested with Bernie Madoff. The appeal was all too obvious – who wouldn’t want to see their money compound at 10% a year? – and many of his investors had allocated 50% or more of their assets to his investment program. Their lives were forever changed. So too were many of those who bet the farm on Internet stocks in the late 1990s or in collateralized mortgage obligations in the run up to the collapse of Lehman Brothers in 2008.
 
Time will tell how some of today’s high-wire strategies pan out, including stretching for yield by extending credit qualities or maturities, and buying high dividend-paying stocks regardless of their fundamentals. We also have to wonder how much risk there is in purely passive portfolios, in the wake of massive asset flows to indexed funds that have inflated the biggest stocks. (See the article by our Chief Investment Officer John Apruzzese here.)
 
Not everyone shares this perspective. A client left us recently to move his assets to a 100% passive equity strategy: making a leap of faith in the continuing growth of the fastest rising major sector of the market since the Great Recession, without any corresponding diversification into other asset classes. He was attracted to the low fees and turned off by the prospects for bonds. (See the article by Brian Pollak and Howard Cure that outlines our view of the bond market and makes the case for maintaining an allocation to the asset class here.)
 
While a 100% allocation to passive equity might be a reasonable solution for some endowments, or for an institution with a perpetual investment time horizon, or, for that matter, Messrs. Buffett and Gates, we fear that it is not the right solution for most high net worth individuals and their families. Most of us will need to withdraw funds from our accounts to maintain our lifestyle at some juncture in the market cycles.
 
An index-only growth strategy presupposes that public equities have the highest return potential of all the asset classes. However, after a 7.5% annualized return for the S&P 500 over the past ten years, we believe that well-chosen private equity investments will produce returns that are between 30% and 50% higher than the S&P index going forward, more than compensating this and other qualified investors for the lack of liquidity in this one asset class.
 
We construct resilient portfolios intended to limit drawdowns and to produce reasonable risk-adjusted returns, in all market conditions. Each of us has only one life, and we had better be prepared to live it well, regardless of the market’s next move.
 
Jeff Maurer is the CEO of Evercore Wealth Management and the Chairman of Evercore Trust Company, N.A. He can be contacted at [email protected].