US Market Volatility: Hedging Against Turmoil

Rising rates cause future cash flow to be discounted more steeply and increases the cost of debt that is used to fund growth and share buy-backs, all of which gets reflected in the valuations.

Indexes Plummeting

Market reaction was swift. Investors already expected the Federal Reserve to curb its emergency bond-buying stimulus amid rising inflation. The Nasdaq Composite plummeted 2.83% to 14,546.68 points, its lowest number since March while the S&P 500 and the Dow Jones Industrial Average dropped 2.04% and 1.63%, respectively, to close at 4,352.63 and 34,299.99, respectively.

Tech Shares Lose Rapidly

Even Technology shares dropped rapidly. Facebook, Microsoft and Alphabet dropped more than 3%, while Amazon lost more than 2%. Large chip stocks struggled, as Nvidia slid 4.5%.

“People relied on Google and Microsoft to never go down. Now, they’re getting a reality check,” said one technical strategist.[1] He foresees even more selling after Tuesday, leading to a downward spiral for tech and large-cap growth names.

Hedging Against Volatility and Inflation

Markets are susceptible to countless external factors that are difficult to predict, including geo-political events, investor sentiment, speculation, etc. A rising market can create great wealth and make companies prosper, and a tumbling market can swiftly destroy both.

Some approaches have been proven to help investors shield their wealth from a volatile or inflationary market.

Alternative Investments

Alternatives are unconventional financial assets that tend to be illiquid and unregulated, such as private equity, venture capital, hedge funds, real estate, commodities, and tangible assets. Given their low correlation with traditional stocks and bonds, alternatives are relatively immune to stock market volatility. Learn more about alternative investments here.

Long-Term Strategy

A long-term strategy entails holding illiquid, income-generating asset classes for three years or longer, such as private equity, private debt, real estate, etc. While their book value may be subject to mark-to-market adjustments from time to time, the real value of these assets tends to be immune from market fluctuations, avoiding significant losses. Learn about the merits of long-term investments on here.

Diversification

Diversification is simply about allocating investments in your portfolio to various assets that perform independently from one another. The low correlation between diversified assets optimizes returns and limits losses. Diversification should entail assets from multiple markets, geographies and sectors, so that your portfolio is not affected greatly if any given investment performs poorly. Learn more about diversification on here.

Invest with Us

The Family Office favors a long-term strategy in alternative investments diversified over geographies, sectors and markets to shield you from unexpected downturns in the public markets.

Schedule a call with our financial advisors to start your investment journey.

[1] https://www.cnbc.com/2021/09/28/stocks-could-slide-further-as-rates-rise-big-tech-drags-market.html