Invest like the rich- Avoid big losses! ... but how? (for investors with $1,000,000+)

Let's face it, most wealthy and ultra-wealthy people invest in things the average person doesn't. This is for a multitude of reasons, mostly because they buy or own business, private partnerships, etc. One thing that every investor should study, however, is how the successful investors are investing and why. These people are referred to as "accredited investors" and as such have access to investment opportunities that the rest of the population simply cannot access. This seems unfair, but that is just the way it is. If you are seriously interested in accumulating wealth, becoming an accredited investor should be a priority. So... how do you become an accredited investor and what can you invest in?

An accredited investor fits one or more of the following requirements:

? An individual who, alone or together with a spouse, owns financial assets worth more than $1 million before taxes but net of related liabilities or

An individual, who alone or together with a spouse, has net assets of at least $5,000,000.

? A non-individual (corporation) investing at least $150,000 (minimum investment exemption).

? An individual whose net income before taxes exceeded $200,000 in both of the last two years and who expects to maintain at least the same level of income this year;

or

An individual whose net income before taxes, combined with that of a spouse, exceeded $300,000 in both of the last two years and who expects to maintain at least the same level of income this year.

Ok, so for those of you who qualify as an accredited investor, I would encourage you to study a strategy known as "risk parity". This strategy aims to significantly outperform and generate superior returns for a given level of risk.

Traditionally, an investor with say a, $2,000,000 portfolio would simply go to their bank or investment firm and have them develop a balanced portfolio of stocks and bonds. This generally unsophisticated approach, although effective in up-markets, tends to be horribly ineffective in down markets. As we all know, one of the requirements to building wealth is not losing it. As warren buffet says, you need to be right, more often than you are wrong. Not only do you need to be right more than your wrong, but your wins when your right must significantly outweigh your loses when your wrong.

Eggs in once basket- One well understood saying is "don't put all your eggs in one basket". So, if you were advised to put 90% of your eggs in one basket, you would most likely think this is not sufficient diversification. Many investors however, using a balanced investment approach do this without even knowing it.

How can this be? The answer is that size matters and the size of risk in the stock eggs are about 9X larger than the risk in the bond eggs. This is because, based on the research done by PanAgora Asset Management, stocks represent 9X greater risk. In an example provided by PanAgora (I can email it to you), in a sample balanced portfolio, stocks contributed 93% of the risk and bonds contributed the remaining 7%, assuming a 60/40 mix. While a 60/40 portfolio might appear balanced in terms of capital allocation, it is highly concentrated from the perspective of risk allocation.

This traditional balanced portfolio is most often structured as a balance of 60% stocks and 40% bonds with the intention that the bond exposure will insulate the portfolio in times of downward volatility and actually generate a profit as the bonds can act inversely based on low-negative correlation.

A risk parity portfolio allocates the market risk equally across asset classes including stocks, bonds, commodities and alternatives based on the allocation of risk as opposed to the allocation of capital.

Why is this important and why should you care about risk contribution?

PanAgoras research shows the risk contribution is a very accurate indicator of loss contribution and as previously stated, not losing is a key component to gaining (sorry to over simplify). This research shows that for loses above 2%, on average, stocks contributed 96% to the loss. This is very close to the risk contribution of 93%. When a loss of decent size occurs in the average portfolio (60/40 as this is most common), 90% of the loss is attributable to the stocks. In other words, the diversification effect of bonds in this portfolio is insignificant. This is hardly diversification, although it appears as though it is.

This investment strategy is offered only to accredited investors because of some of the strategies deployed within the fund by its managers. These strategies can include leverage, use of derivatives, dynamic asset allocation and increased flexibility for the manager to make meaningful decisions quickly. It is assumed that investors who fit the accredited requirement are also more educated and informed on investment strategy and are also more insulated from the impact of loss based on a higher net worth.

Do you want to grow your investments and protect yourself from losses?

If you have a significant portfolio and are using traditional investment strategies, you should be doing more. These strategies are designed to reduce risk and increase return and are used by some of the most successful investors in the world, most notably, Billionaire investor, Ray Dalio.

If you are interested in learning more about this or other strategies please let me know. I would be happy to forward you the study done by PanAgora or discuss risk parity investment options and opportunities and how you can benefit from them.

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Year-to-date (to July 31, 2016), the Investors Risk Parity Private Pool produced a 19% total return compared with the S&P TSX at 12.46% or S&P500 at 7.84%. In a down market, theoretically, the Risk Parity pool should be even more attractive.

Disclaimer:

This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Josh Stark is solely responsible for its content. For more information on this topic or any other financial matter, please contact an Investors Group Consultant.

Commissions, fees and expenses may be associated with mutual fund investments. Read the prospectus before investing. The rate of return is the historical annual compounded total return including changes in value and reinvestment of all dividends or distributions. It does not take into account sales, redemption, distribution, optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, values change frequently and past performance may not be repeated.

The rate of return shown is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.