Dan Dobry

A new perspective on the world of investments

The art of investing will change significantly, in fact, the change is underway. People place great value on having their investments managed optimally; however, people are looking for more than just investment management.

They’re looking to accomplish their financial goals by having someone stress test their total financial picture to make sure that they’re making good sustainable decisions. This includes areas such as tax planning, risk mitigation, estate planning and other customized services that are relevant to the clients’ goals and needs. While creating good investment solutions is an important aspect, there has been a shift to a greater emphasis placed on managing the total financial picture, and how all these pieces work together in the most optimal way.”

When it comes to the future of investing, there are two aspects to be considered.

On one hand, experienced investors encounter the challenge of identifying both promising strategies with a blend of alternative investment products.

Allocating resources via trustworthy efficient investment vehicles and asset classes will be an important component of reaching long-term financial goals. While drastically reducing the risks with good sustainable and trustworthy due diligence.

As client control over their own capital becomes more popular, intangible aspects of investing and developing relationships such as mentoring, focusing on education and building strategies aligned with life goals will become essential.

Focus on Capital Preservation

But first. What Is Preservation of Capital?

Preservation of capital is a conservative investment strategy where the primary goal is to preserve capital and prevent loss in a portfolio. This strategy necessitates investment in safe investments, such as Treasury bills, Real Estate, structured notes with Capital Guarantees and certificates of deposit.

Understanding Preservation of Capital

The key to understanding the preservation of capital is understanding the family needs and building a strategy for the family based not only on their aspirations but also on their capacity for exposure to risk and understanding what the implications are if the investments lose value in the short or medium term.

Investors should hold their funds in various types of investments according to their investment objectives. An investor’s objective or portfolio strategy is dictated by several factors, including age, family responsibilities, education, annual income, etc.

The Academic process backed by research and implemented by qualified professionals has six components. They are: Financial Management, Asset Management, Risk Management, Tax Planning, Retirement Planning, and Estate Planning.

Focus on Risk Management (Profiling) and Stress Testing

The “Risk Profile” is an evaluation of an individual’s willingness, capacity, and ability to take on risks. A risk profile theoretically therefore is important for determining a proper investment asset allocation for a portfolio.

Controversially, it is accepted that if an individual expresses a desire for the highest possible return—and is willing to endure large swings in the value of the account to achieve it—this person would have a high willingness to take on risk and is a risk seeker, however is it really clear to the investor that the risk the investor is taking is not achieving a high return over time with volatility in the process but actually taking on the risk that he could expose himself to the possibility of losing all his money.

The use of scenario techniques enables stress scenarios (what if scenarios, for example what if the dollar loses 20% of its value, what if there is a crisis in the stock market etc) —in addition to realistic economic performance scenarios—to be factored into decision making. Scenario-based asset allocation can therefore be an effective tool for constructing stress-resilient portfolios.

While risk profiling and scenario management is very important the priority is to work on the individuality of investors and their specific life goals, dreams, values and aspirations and align the asset allocation accordingly.

Focus on understanding the world of Private Equity

How do companies grow? In the past they would rely on private capital, talent, experience, and the banks. If they survived this first stage, and still have great potential, they could consider an initial public offering (IPO) on the stock market, and then after they are established, they could also turn to the bond market.

Those things still exist, but increasingly, the capital behind growth around the world is a product of private equity funds and not public markets. In private equity offerings, deep pools of money are used to make direct deals, in what companies see as a more cost effective and flexible approach for providing the resources needed for growth.

What is private Equity?

Investopedia defines Private Equity as “An alternative form of private financing, away from public markets, in which funds and investors directly invest in companies or engage in buyouts of such companies. Private equity firms make money by charging management and performance fees from investors in a fund.”

It’s not new. It’s the way J.P. Morgan, the private banker, worked in shaping the US steel industry. In the decades after World War II, private banking was overshadowed by Global Stock Exchanges that provided an access to liquidity, which helped make equities widely held among global investors, while traditional banks were the main source for start up loans.

What is happening now? Traditionally Private Equity was reserved for Ultra High Net Worth families or Institutional investors that had the resources to invest large amounts in one trance, but now Private Equity is entering mainstream, fueled by technology that allows crowdfunding or investment funds that can register on exchanges with minimal cost (the Cost of an IPO can be over one Million USD without a guarantee of success and a Private Equity fund would cost less than 5% of this).

How big is the Private Equity Market today?   

Assets in global private markets totaled $10 trillion in September 2021, nearly five times as much as in 2007. Public markets are still far bigger but have grown more slowly, roughly doubling in the same period. In the US, companies that have stayed private have raised more money than those whose securities trade in public markets every year since 2009, according to a Morgan Stanley 2020 report. In debt markets, private credit represents a frac­tion of the financing provided by banks or publicly traded bonds but doubled glob­ally over the last five years to $1.2 trillion.

Focus on Understanding the challenge of liquidity.

Garnering increased attention and popularity in recent years, alternative investments have become a staple portfolio addition for those seeking stable returns and less volatility. Interest in this “patient” approach has especially intensified after the financial crisis of 2008, as investors realized the importance of risk mitigation by investing in assets that are not correlated to markets and now in 2022 in the current market crisis. Despite this, there are still some who shy away from alternatives altogether because these investments are less liquid when compared to their public stock and bond counterparts. In addition to being a major deterrent to portfolio inclusion, illiquidity has presented many challenges to investors new to increasing allocations to alternative investments.

Challenges of Illiquid Alternative Investments

Traditional investments such as public stocks and bonds are frequently traded at high levels of volume. By contrast, alternatives have varying degrees of tradability and sometimes can take upwards of a few years for an investment to be realized responsibly. The longer lockup periods of alternative investments and a lack of secondary markets result in a reduced ability to address cash flow requirements, quickly react to new information, enter, and exit investments, and consequentially, rebalance portfolios on a frequent basis. As a result, investors with shorter time horizons and greater liquidity needs may find it difficult, even undesirable, to incorporate alternatives.

The extended time it takes to realize investment returns also makes it more difficult to manage a consistent allocation to alternatives.

Illiquidity has the additional benefit of promoting rational investment behavior by insulating an investment portfolio from irrational investor behavior. The longer lockup periods that characterize alternative assets can benefit investors by reducing behavioral risk. As seen in the public markets, continuous pricing on investments can have the adverse effect of framing irrational results. As market volatility is tempered through allocations to alternative investments, so too is the likelihood that an investor will succumb to fear-based selling. All too often during market corrections, investors consistently stray from the course and sell at the wrong time, increasing the potential for losses and damaging returns. The illiquid nature of certain alternatives can temper these impulsive reactions.

Is liquidity still the king?

The importance of liquidity appears to be debatable. An investor with a long enough time horizon can benefit greatly from incorporating alternative investments and ensuring that the range of allocations over a certain time is acceptable. However, investors should also consider their risk profiles, need to access capital over a given time, and spending requirements in evaluating the trade-off between liquidity and potentially enhanced returns.

Focus on opportunities. 

Joe Williams, co-founder of Keller Williams, said lately that after 5 decades in the space and 173,000 real estate agents under their company, there is no good or bad real estate market. There are only the markets you sell in and the markets you buy in.

The market today is more depressed than it was in the last decade. This is a time of opportunity and not of procrastination.

Focus on the Platform you are investing on.

For example, actively managed certificates offer professionals great flexibility for tailoring investment strategies. The well-known and widespread fund structures are often neither accessible nor suitable due to various limitations, such as high set-up costs, poor flexibility, and regulatory restrictions. An alternative that overcomes these limitations and has become popular in Europe and the USA in the last decade is actively managed certificates (AMCs).

Banking has changed during the past couple of years entirely, and the landscape of creating innovative financial products has changed even more rapidly. Traditional processes are replaced by some of these high-performing securitization platforms.

It explains a new generation of customizable, streamlined, and cost-efficient securities creation tools.

Innovators no longer need to develop from scratch. Using a choice of the best White Label platforms you can generate your own securities professionally and at the lowest costs.

Summary: We live in an exciting new world and are swimming in uncharted waters, never, has a professional had so much impact on families lives and families have had the opportunity to shape their own destinies and be a partner in the process of defining where their assets will be invested.

About the Author
Dan Dobry was the founder and a director of the GlobalNET Investment House, he was one of the founders of the Union of Financial Planners in Israel (UFPI) and served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and was a member of the Committee for Standards and Qualifications for the European Union (SQC) until December 2021.