‘Black Swans’ Could Shake Down Advisor Investments

Financial advisors would face difficult decisions on how to respond in the event of a black swan event that disrupts the Nov. 8 election.

Industry personnel discussed the possibility recently at a Harvard Club event in Manhattan.

A black swan often acts as a catalyst that causes the market to depart from the expected but it cannot be predicted. For example, experts say the 2008 recession was a black swan because it occurred suddenly, unexpectedly and eventually resulted in the unprecedented Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

“We think there are a number of black swans possible,” 3EDGE Asset Management Founder Steve Cucchiaro told a group of journalists over lunch.

Below are investment strategies from the Boston-based 3EDGE executives for three black swan events that are unlikely but not impossible.

Italexit

As Italy prepares for a referendum on constitutional reform that’s scheduled to take place in December, some European Union (EU) critics are campaigning for an Italian Brexit-style exit.

Financial advisors have been interested in Europe for undervalued investment asset classes even though the market has a whole has not performed well lately.

“That could play out very well unless Italexit actually occurs,” Cucchiaro said.

In the event that the EU experiences further break outs from Italy and even France, advisors can expect trouble in the form of volatility.

“Since there's a special worry, the recommendation is not to overly invest your client’s assets in European securities at this time,” Cucchiaro told Advisor News.

Donald Trump

The latest swing state polls show Trump’s path to the White House is narrow at best. However, if the sly businessman does secure the 270 electoral votes needed to win the presidency, it would be a surprise that seriously impacts the market.

“Buy gold bars, put them in your safe and bolster your cash assets,” said 3EDGE Chief Investment Strategist DeFred Folts.

A Trump presidency could potentially lead to a severe correction.

“If you wanted to position against Donald Trump winning, you would want to make sure your client's assets are not overly exposed in equities,” Cucchiaro said.

The Bond Market

If the bull in the bond market comes to a screeching halt after the inauguration of the new American president, whether it’s Hillary Clinton or Donald Trump, shocked investors who aren’t prepared could experience it as a black swan.

“We're not saying sell all bonds, but advisors should position their client’s portfolios for the potential of rising long-term rates because that could cause your long-term treasury bonds to lose money,” Cucchiaro said.

To dislodge complacency, start by evaluating client’s bond portfolios so that any sudden changes are not a shock.

“Many investors have a lot of money out at the long end of bonds because they've done so well and that's where they can make money since yield is there,” Cucchiaro said.

Instead, try moving nominal investments into Treasury Inflated Protected Securities (TIPS).

“The good news about TIPS is they would continue to earn your return at the rate of inflation so that when and if inflation does start to rise, your return will keep at that pace whereas with the nominal bonds you might lose relative to inflation," Cucchiaro explained.

Juliette Fairley is a business and finance journalist who has written four personal finance books for John Wiley & Sons and has written for major news organizations, such as The New York Times and The Wall Street Journal. She is a member of the American Society of Journalists and the New York Financial Writers Association and a graduate of Columbia University's Graduate School of Journalism. Juliette can be reached at [email protected].

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