A Case for Equities: Understanding Volatility in an Era of Economic Uncertainty

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| Escrito por John O'Rourke, vicepresidente, asesor de Patrimonio y Banca Privada

Volatility is ever-present. But that does not mean investors and entrepreneurs seeking opportunities need to be its victim. Equities can provide higher returns, more liquidity, greater tax advantages, and wider portfolio diversification than many other comparable asset class investments, allowing for wealth generation and preservation even in times of unprecedented economic uncertainty.

Rapid changes in asset prices—otherwise known as volatility—are an ever-present, often anxiety-inducing force in all markets. Yet, when considering how and where to invest your money there are always opportunities to be found in uncertainty. In every unpredictable economic climate, equities offer one of the most dynamic and potentially profitable investment strategies to build and protect wealth for those who understand that volatility is a temporary phenomenon.

Understanding, managing, and finding valuable opportunities in a volatile environment is one of the most important parts of our job as wealth advisors. This means working closely with our clients, setting clear and achievable goals, staying on top of fast-moving shifts in the markets, and most importantly, not letting short-term market volatility dictate long-term decision-making. Eliminating knee-jerk emotion from the wealth building equation is critical to creating a durable financial legacy.

In the simplest terms, an equity investment is the fractional ownership of a company through the purchase of shares in that company. For our entrepreneurial clients, it is the privately held shares of their own companies which rarely trade that are the principal source of their wealth. Just because these shares infrequently change hands, however, does not mean that their value does not fluctuate along with equity markets in general. Publicly traded shares on the other hand, which are quickly and easily bought and sold on exchanges affording very deep markets, offer liquidity without foregoing superior returns, but at the cost of visible volatility. Understanding that volatility is temporary and can be bridged at a modest cost is the key to out-performance. Our advisors work with our clients to ensure that bridge is always sufficient to conservatively meet their investment goals without sacrificing peace of mind.

Publicly traded equities, by definition, are highly liquid when compared with other asset classes like real estate. This means your money can be strategically deployed across numerous companies within multiple domestic and international sectors. This inherent diversification minimizes investment portfolio risk and offers professional investors the flexibility to inexpensively adjust and modify their investment allocation based on market conditions. In addition to minimal transaction costs, equities also offer less hands-on management and significant tax advantages, particularly considering the relatively low tax rates on capital gains and dividends. Most importantly, in today’s uncertain economic climate, equities offer investors the ability to dynamically manage short-term economic uncertainty while remaining focused on their long-term wealth building goals.

History continues to show that short-term volatility can be waited out. Markets always recover over time and trying to “time” the market is a losing battle. By the time things begin to “look good” again, rock bottom discounts and buying opportunities are usually missed. Investors end up selling on the downside and buying on the high which is exactly the opposite of what they should be doing. The key is for investors to understand that today’s short-term volatility can be managed for the benefit of long-term gains and provide buying opportunities of well-run companies if they are paying attention.

We are also bullish on what we calls the “1% Rule”—which factors in the compounding benefit of earning just an additional 1% return on equity investments over time. For example, one dollar invested at 9% compounded interest over 30 years results in a return of $13.27. When invested at 10%—just 1% more—that return is $17.45 (a 31.50% improvement). Employing this type of active wealth management strategy can pay off significantly for investors in the long run. A slightly different investment allocation with more equity emphasis can easily improve portfolio returns with similarly impressive long-term results.

Many advisors recommend that their clients minimize volatility by reducing their equity exposure and holding more of less-volatile sectors like bonds or cash. This does reduce volatility, but it also significantly reduces return. Understanding that your investment horizon could be long enough to wait out volatility will substantially improve long-term returns. At First American Bank, our mission is to help our clients understand what level of volatility is tolerable for them to optimize their long-term wealth creation goals.

A majority of our clientele are successful businesspeople and entrepreneurs. They bank with us personally as well as professionally. We know them, their businesses, and their families on a very personal level. As investment advisors, this puts us in a unique position to carefully devise investment strategies that fit their objectives in a truly holistic way down to the smallest detail. Investing for the long term and taking advantage of opportunities during periods of uncertainty are just a few investment strategies that can produce higher returns over time.

Professional investment management and portfolio diversification through equities does just that.

For more information on how First American Bank's Wealth Management Group, private bankers, and wealth advisors can help you design a long-term investment strategy or help to re-evaluate your current investment portfolio contact our wealth team.

First American Bank investment products are Not FDIC Insured, Not Bank Guaranteed, and May Lose Value.

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