Written by John O’Rourke, Vice President, Private Banking and Wealth Advisor
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 volatility.
Why equities?
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 can understand that volatility is a temporary moment in time.
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 economic uncertainty. Understanding, managing, and finding valuable opportunities in a volatile environment is one of the most important parts of success in the stock market. This is why we recommend working closely with a trusted financial advisor who can help you in 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 reactions from the wealth building equation is critical to creating a durable financial legacy.
Maximize your earnings through equities
For business owners and entrepreneurs, 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.
Since publicly traded equities are highly liquid when compared to other asset classes, 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 economic climate, equities offer investors the ability to dynamically manage short-term volatility while remaining focused on their long-term wealth building goals.
The nature of volatility
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.
How the 1% rule can help you achieve your goals
We are also bullish on what we call 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.
How First American Bank can help
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. 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.
Manage your investments wisely. Connect with a wealth advisor today!
Want more articles like this?
Sign up for First American Bank’s monthly business newsletter.
First American Bank is a privately held, full-service bank with international expertise. With almost 50 years of experience and 61 locations across Florida, Illinois, and Wisconsin, we aim to create solutions, deliver exceptional customer service and provide unmatched expertise in commercial banking, wealth advisory, and personal finance solutions.
Disclosure: First American Bank investment products are Not FDIC Insured, Not Bank Guaranteed, and May Lose Value.
