Moving from the Current Strategy to the New Strategy
When a family has just experienced a major liquidity event and is mainly invested in cash, or when a family has engaged a new advisor who has recommended a different strategy than what the family has been using, the question will arise: How do we move from our current position to the new strategy?
The answer depends mainly on market valuations at the time the new strategy has been selected. If it's 1999 and the equity markets—especially the growth and tech sectors—are selling at all-time highs, it would be very foolish to move quickly to a fully invested position in stocks. Sure, the markets could continue to run for a while, and if the family isn't fully invested they won't fully participate in the run-up.
But this is a minor problem—after all, the family is already rich. On the other hand, if the family jumps heavily into extremely rich equity markets, it will be vulnerable to a price collapse—and such a collapse did in fact occur in early 2000. For a family that has spent an entire lifetime—or several lifetimes—building its wealth, losing a substantial chunk of it right out of the box is a devastating event.
Instead, the family will be better advised to move slowly into the equity markets, probably not moving above its minimum equity targets and also focusing on undervalued sectors like value stocks.
On the other hand, if it's mid-1974 or early 2009 and the markets are in the tank, moving to a fully invested equity position rather quickly can make sense. Even if the markets continue to decline for a while, the stocks will have been purchased at attractive valuations and the family can be assured that any losses will be made up.
Moving to a new strategic target when the markets are in a screaming bull phase or a frightening bear phase isn't complicated (though it can be nerve-racking). But suppose you, the advisor, are agnostic or uncertain about the markets. For example, in late 2011 and early 2012, there were both attractive and unattractive aspects of stock prices. P/Es were relatively low, corporate profits were high, and balance sheets were strong. The U.S. economy seemed to be slowly growing again. On the other hand, there were serious concerns about a blowup in Europe and/or a war with Iran, and Shiller CAPE ratios suggested that stocks might be seriously overvalued.1
In cases of uncertainty, my suggestion is to keep firmly in mind how long it took the family to get rich. In one case I began advising a family that had sold a business that took three generations to build. It was early 2001 and I didn't know whether the bear would continue or whether markets would improve. My inclination was to invest the family's capital very slowly—over three or even five years. Although the family members weren't experienced investors, they were concerned about taking so long to get to a fully invested position.
So we compromised. I took $100 million (a fraction of the family's total wealth) and invested it immediately in the long-term strategy I had developed but was reluctant to fund. The rest of the capital remained in cash and bonds, along with a few opportunistic bets and some absolute return-oriented hedge funds. Although the fully-invested $100 million portfolio didn't do very well, it helped the family understand what investing was all about and how complex the risks can be. Meanwhile, the main bulk of the family's capital preserved its value and we accelerated the investment program as the markets recovered in 2003.