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High net worth

A peek into the coming year through wealthy lenses Add to ...

As 2010 draws to a close, the wealthy have turned their eyes to the future. And they're not exactly happy with what they see.

In fact, there are several economic issues that are keeping high-net-worth investors up at night. These worries have had a profound impact on the investment decisions these investors have made over the past few months.

At the same time, the wealthy know that behind every financial cloud lies a silver lining. As a group, they are continuing to identify intriguing opportunities.

Given how the wealthy are often ahead of the curve when it comes to investing and risk management, I thought it would be interesting to highlight some of the concerns and opportunities spotlighted in a recent survey of TIGER 21 members - a group of 150 wealthy entrepreneurs (most of them American), with an average net worth of $75-million.

The worry: Double-dip recession

Many high-net-worth investors worry the U.S. economy is on shaky ground. They wonder whether Washington's extraordinary efforts to solve the financial crisis - including the incurring of massive deficits, big industry bailouts, and an unprecedented level of economic stimulus - are enough to pull the world's largest economy through the worst recession in nearly 80 years.

The response: The wealthy are cutting performance expectations for their U.S. holdings. While they continue to hold U.S. stocks and bonds, particularly investment grade and diversified high-yield credits, they are seeking opportunities in international markets (Canada among them). They are also exploring currency hedges and other forms of protection against a falling U.S. dollar.

The opportunity: High-net-worth investors continue to be bullish on emerging markets. Most believe the opportunities in China, Brazil, India, and other developing economies, remain exceptionally attractive, particularly when compared to the U.S. and Europe.

The worry: Another market crisis

The vast majority of wealthy investors surveyed (over 70 per cent) believe markets will take a turn for the worse in the coming months. While there is a range of opinion as to how bad the pullback will be (most expect it to be between 10 per cent and 30 per cent), respondents continue to worry that choppiness will make for a challenging investment climate in the months to come.

The response: Wealthy investors are keeping overall equity exposure flat after a strong rally since June, but trimming back speculative positions, as these are likely to experience the most volatility in the event of a market pullback. Many are keeping a fair bit of their portfolio in cash, clearly anticipating bargain-shopping opportunities in the months to come.

The opportunity: The wealthy have expressed significant interest in alternative investments over the past year or so. High-net-worth investors are allocating more of their portfolios to hedge funds, managed futures, and alternative asset managers, who can not only protect them against expected volatility but actually use volatility to make money.

The worry: Inflation/deflation

Analysts and economists are divided over whether the U.S. will suffer inflation or deflation in the months to come. The wealthy seem to be, too. Some high-net-worth investors have adjusted their portfolios to defend against (and take advantage of) inflation, while others are doing the same for deflation.

The response: Those who believe inflation is more likely are buying commodities, precious metals, and dividend-paying blue chip stocks, while cutting back the duration of their bond portfolios. Those who anticipate deflation have taken the opposite approach, beefing up cash or cash equivalents in their portfolios. A few are buying government bonds and buying gold and other precious metals as well.

The opportunity: One intriguing opportunity both camps have pursued over the past several months is income-producing real estate. This is particularly true in the U.S., where the real estate market has suffered for several years, and it's possible to purchase attractive revenue properties for a fraction of what they would have cost before the financial crisis.

 

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