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Ignore the Hype and Protect Your Portfolio

Billionaire Larry Fink recently made headlines when he declared that he was more optimistic than ever about the stock market. He says investors should be 100% in equities presently if they can handle it. That’s crazy talk. Stocks don’t even make the top 2 of the lists of preferred assets of the ultra-wealthy, so to hear a billionaire tell other investors to be 100% in equities is crazy talk to them. 

Dig a little deeper, and you’ll understand that Larry Fink has a vested interest in peddling this type of maniacal portfolio allocation.

In light of economic uncertainty and massive corporate layoffs, the fact that a billionaire is urging investors to remain positive about the stock market when all signs are pointing to market volatility is unsettling. But it shouldn’t come as a surprise, given Fink’s background. 

As CEO of Blackrock, Fink and his company have a vested interest in maintaining calm in the stock market. With $9 trillion in assets under management and one of the most popular index funds available, Blackrock has a vested interest in making sure this index fund doesn’t tank and disappoint its investors. A poor stock market means poor performance of its index fund, which impacts its bottom line, which reflects poorly on Larry Fink as CEO.

Investors would do well to ignore the hype of self-interested Wall Street types like Larry Fink. Smart investors ignore his type. These investors would never dream of allocating even a third of their portfolios to stocks, let alone 100%. According to the recent asset allocation of one such group of sophisticated ultra-wealthy investors, private company investing (i.e., private equity) and commercial real estate constituted more than 50% of the portfolios of these investors, with stocks coming in third.

Larry Fink is no dummy, but he thinks the average investor is—at least he thinks they’re gullible. And he’s probably right. The average investor is an emotional investor, prone to making decisions based on impulse and not sound fundamentals. It’s this propensity to invest based on emotion that explains herd behavior.

The average investor is susceptible to statements and declarations from blowhards like Larry Fink. They hear the word billionaire, and they instantly believe whatever comes out of his mouth. It’s not just talking heads that have sway over investor behavior. Geopolitical conflicts, the news, and social media all drive the markets in irrational ways. You can blame market volatility on market liquidity. The ability to buy and sell stocks at will enables investors to act on their impulses, creating tsunamis from ripples.

Ultra-wealthy investors know better. They understand the vested interests of Wall Street players and are able to ignore the noise better than most. But they have an additional weapon in their arsenal to insulate their portfolios from market volatility and herd behavior: they take impulses and emotions out of the investing equation by investing in illiquid assets. By locking up their investments, ultra-wealthy investors protect themselves from themselves and irrational decisions.

Smart investors insulate themselves from market uncertainty and the negative impact on their portfolios of economic developments such as layoffs. They do so by avoiding the equities markets, contrary to Larry Fink’s advice. 

Smart investors know that soft assets like stocks are susceptible to economic unrest and stock market volatility. So, instead of allocating to equities, they allocate away from them. Instead of soft assets in the public markets, they allocate them to hard assets in the private markets.

Hard assets like real estate and income-producing brick-and-mortar businesses are ideal hedges against recession, inflation, and general economic uncertainty. And assets that are tied to essential goods and services are particularly advantageous. Assets tied to shelter, food, and fuel, are examples. That’s why the ultra-wealthy have a particular predisposition for real estate. By investing passively in these types of assets, smart investors are able to generate reliable cash flow along with appreciation during uncertain times, all backed by a tangible asset that cannot be lost in its entirety.

The ultra-wealthy ignore the noise. While all signs point to a recession and economic growth pains, Wall Street is still in the business of protecting its own hide. Ignore the talking heads and allocate them to assets capable of withstanding economic downturns. 

Don’t allocate to equities. Allocate cash-flowing hard assets like real estate and private businesses.

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