This Week Offered Investors Some Relief. High Net Worth Investors Still Hope to Offset Risk

High-net-worth households have sought to reduce risk as the war with Iran has weighed on returns.

Some of that stress has receded, as investors this week celebrated signs of progress toward a resolution and pulled stocks higher. Still, many experts believe the uncertainty that has weighed on markets for weeks has yet to fully pass. While some investors sense a return to “euphoria,” others have lately looked for protection from further drawdowns. They’re adopting a few different strategies to do that.

Many American traders and institutional investors have pivoted back toward domestic markets and adopted strategies that better align with benchmark indexes, said Kristy Akullian, head of investment strategy for the Americas for BlackRock’s iShares exchange-traded funds. High-net-worth investors may also be more likely to diversify into alternative investments and to use options to hedge against losses, she said.

“Geopolitical tensions can lead to higher energy prices, and higher energy prices lead to higher inflation, and inflation really profoundly changes the way that stocks and bonds interact,” Akullian said. “That can have really huge implications for a balanced portfolio.”

Infrastructure funds, which can tap into everything from construction materials to utilities, are one way she said high-net-worth investors have buffered volatility in the stock market alongside bonds, which perform that role in the traditional portfolio template of 60% stocks, 40% bonds. David Krakauer, vice president of portfolio management for wealth-management firm Mercer Advisors, said investing in private companies is another alternative.

And wealthy households have been embracing options—effectively, contracts that give the holder a right to buy or sell a security within a particular time—as a way to limit losses, Akullian said, and hedge against a specific type of exposure in their portfolio. (Investors considering options strategies, should note carefuly the potential tax implications, according to Krakauer.)

Morgan Stanley’s Kathleen Entwistle recently said her firm has been conservative with new money from its high-net-worth clients, in some cases favoring cash.

Broadly speaking, wars and other crises don’t change the fundamentals of investing, Krakauer said. Financial advisors recommend buying companies and assets with long-term prospects, not trying to “time the market” by responding to short-term moves.

That said, investors have valid reasons for wanting to know what the 1% are doing. The portion of investible assets held in accounts with more than $5 million has gone from 30% to more than 50% over the past decade, Akullian said.

“A lot of assets are moving upmarket,” she said. “What high-net-worth investors are doing has a bigger impact on the market.”