To say that the markets have been turbulent the past couple of weeks would be the understatement of the year.
The market’s ups and downs make the world’s most extreme roller coasters seem like child’s play. In my lifetime, I have never seen the stock market more sensitive or more easily manipulated by the latest crisis or threat than in the past couple of years.
Social media and a media eager to drum up panic to stay relevant have changed the investing landscape. Add to that an extremely liquid market due to the ease and convenience of mobile transacting, and you have a recipe for volatility.
Whether it be trade wars, the threat of war, terrorist attacks, natural disasters, socio-political conflict, impeachment, or the latest potential pandemic like the coronavirus, the stock market can rise and fall from the mere threat of crisis without any real underlying economic justification for the extreme shifts. It’s enough to make any investor dizzy.
Take, for instance, the fear that gripped the markets last week over the threat of the coronavirus pandemic. Everywhere you turned, the media was predicting doom and gloom – with one network even predicting an apocalypse with a straight face.
The result was a drop of more than 3,600 points by the Dow in just one week, but that considerable plunge had less to do with reality and more to do with fear-mongering and an over-trusting investing public.
The reality of the coronavirus is that only around 2,700 people have died from it – mostly in China – with only 6 of those deaths occurring in the U.S.
In contrast, more than 14,000 deaths have already occurred this flu season in the U.S. In terms of human life and measurable economic impact in the U.S., the flu has been far more devastating than the coronavirus, yet it has had exactly the opposite effect on the DOW – meaning no effect.
Once again, perception is far from reality with this latest crisis, but this isn’t an isolated incident as recent fears surrounding trades wars, hot wars, politics, etc. have also proven to move the Wall Street needle far more than the underlying reality.
The truth is many sophisticated ultra-wealthy investors were unfazed by the recent market turbulence.
That’s because they’ve diversified away market risk and volatility by allocating their investable capital to alternative assets – with a preference for tangible assets that provide cash flow and appreciation uncorrelated to Wall Street.
In turbulent times, these sophisticated investors have installed safeguards in their portfolios to ensure uninterrupted cash flow. They accomplish this by incorporating multiple levels of diversification through a mix of asset classes, compensation structures, hold periods, and, most importantly, geographic locations – domestic and offshore.
Offshore alternative investments offer a variety of benefits – in good times and in turbulent times:
The most apparent benefit of offshore investing is diversification. Now more than ever, diversifying across asset types, markets, and even currencies is essential for hedging against Wall Street volatility.
The premise that not all world markets are correlated. A recession in the U.S. will not necessarily lead to a recession in another part of the world.
Bargains in Unsaturated Markets.
By expanding the investing pool offshore – specifically emerging markets – an investor can broaden their opportunities to find undervalued assets.
This is especially helpful in turbulent times as undervalued assets that generate high cash flow, along with appreciation, can offset any slowdowns in other markets.
By taking calculated risks in stable, foreign jurisdictions can lead to finding these potentially rewarding bargains.
Less Saturation and Less Competition for Tangible Assets.
There is less competition – both domestic and foreign – for tangible offshore assets that can shield an investor from wild market swings that can pay off in the short-term from income distributions and over the long-term from appreciation.
Growth in offshore emerging markets has the potential to outpace growth in developed economies like the U.S., where populations are getting older and growing slowly.
Emerging markets like many countries in Latin America, Asia, and Africa all have young, fast-growing populations who are underserved, lacking the consumer goods we take for granted.
Offshore investing in those areas promises to deliver higher growth as their young populations enter the workforce and grow their respective economies.
One incidental benefit of offshore investing that isn’t necessarily measurable in dollars and cents is that in many countries – especially in Central America – property ownership grants immediate residency, which in the context of the current pandemic fears can provide a safe haven for those hoping to escape exposure in a less populated locale.
Offshore investing can provide a myriad of benefits – both economic and non-economic – in turbulent times.
Sophisticated ultra-wealthy have long incorporated offshore investments to offset any potential downturns in their domestic holdings to ensure uninterrupted cash flow and wealth accumulation.