Volatile market events create unexpected opportunities for wealthy investors

a 100 dollar bill with Franklin wearing a mask and virus shapes overlaid

Fear and uncertainty regarding the spread and impact of the new coronavirus (COVID-19) outbreak have created widespread volatility across various investment markets beginning in late February of 2020. And while many news outlets and headlines focus on the risks the virus poses to the general population and drastic drops in domestic markets, there have also been unexpected market opportunities created in the wake of the virus that may benefit wealthy investors.

An enormous question that is hard to answer is how long the current market conditions will last. Much of that depends on when cases of the disease peak globally and important foreign economies, such as China’s, return to strength. In a research paper, consulting firm McKinsey & Company suggested in the best-case scenario this may happen as early as Q2, but the current conditions are more likely to last into Q3 and possibly through the rest of the year. The situation remains fluid and subject to change by many experts.

We should all hope for the best case, of course, but in the meantime, an investor can still endure the volatility and may benefit in the conditions created by the coronavirus.

Leverage investment returns in historic rate environment

With a slowdown in the growth of the global economy expected — and even worries over a possible recession — fear in the marketplace often stirs up a perfect storm of unique opportunities for investors with the right strategy.

The current situation in the wake of the coronavirus is of tremendous historical significance, as the yield on the 10-year treasury bond dropped to its lowest point in history on multiple occasions in 2020. This is not a good thing for prospective bond investors looking to reinvest in the market, but it is a tremendous opportunity for wealthy investors who have the ability to borrow using their portfolio as collateral and lock in fixed borrowing rates never before seen. Of course, this is increasing your level of debt and debt is something one has to be comfortable holding.

These low borrowing rates first appeared during one of the largest-ever weekly declines in the U.S. stock market. When you combine the ability to borrow at extremely low rates relative to history and simultaneously invest in long-term growth investments at a significant discount, it is a particularly unique wealth opportunity for those with the necessary means, ability, and capacity to borrow.

Save significant taxes at the intersection of interest rates and tax policy

Wealthy investors are often subject to substantial taxes throughout their life and, for many, even more taxes at their death. There is a $10-million ticking “tax time bomb” that will impact very wealthy couples over the next 5-6 years, which, in our estimation, many will fail to take advantage of prior to its currently scheduled expiration. When you combine this time bomb, with the fact that historically low interest rates create a very favorable environment for certain estate tax-saving strategies, you have a chance to create millions of dollars in generational wealth savings.

Deploy cash when it seems each type of investment has its own set of issues

If you have just sold a business or experienced a major liquidity event, where should you deploy cash when bonds are paying historically low interest rates and equities are experiencing a decline not seen since the financial crisis? The answer may not be holding cash, either, as rates of return are quickly returning to the low levels of recent years past.

Unfortunately, neither is “wait and see” a good idea. There were many nervous investors with large amounts of cash in late 2018, and their reluctance to invest cost has cost them to the opportunity cost of a diversified portfolio. In the past 20 years, we’ve only had one other 30%+ year in U.S. equities.

During times of market uncertainty, it’s easy to react emotionally. But the fact that our economic status ebbs and flows over time will never change. The key is knowing how to take advantage of market opportunity, while investing and planning for the long term.

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About the Author

Michael Krol, CFP®, CPA is a partner, leading Waldron’s Wealth Advisory Team. He has been a driving force for the firm’s growth while maintaining focus on his goal of 100% client retention.

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