Recession-proofing wealth Featured

8:00pm EDT April 25, 2009

Against the backdrop of a gyrating equity market, it is important to have a professional wealth manager who understands your goals and objectives. Such an adviser can help you build a long-term investment plan with diversification across multiple asset classes.

“Liquidity and transparency of investments should be a priority,” says Sandro Rossini, senior vice president, regional manager of Wealth and Institutional Management at Comerica Bank. “Many managers have traditionally felt that there was no place for cash as an asset class. The recession has taught us the importance of cash.”

Smart Business spoke with Rossini about how to recession-proof wealth, the benefits of ready lines of credit and what to look for in a portfolio manager.

What steps can individuals take to recession-proof their wealth?

During this recession many families and businesses have witnessed their wealth evaporate in a relatively short period of time. While this is terrifying we do have to remember that recessions are followed by recoveries. The recession officially began in December 2007. The average recession lasts about 10 months, so we’ve already exceeded the average recession period by several months, but at some point, we will recover.

The first thing I would recommend is building up reserves of cash and credit to cover the risk of reduced income. Right now cash is king. No. 2, evaluate your investment portfolio in defense against any further drops. Thirdly, I would reduce costly debt. Rates are now at historic lows; refinancing or restructuring a loan or line of credit can save a lot of money. Finally, be cautious with expenditures. If your income level is good, you can quickly build up your reserves by tightening your budget.

Why is it so important to have ready lines of credit?

Credit permits individuals and businesses to continue to manage their expenses if income levels dip. Tapping in to credit in place of selling a depressed investment can allow you to recover losses or even generate a nice profit when market prices rebound. The DOW was down more than 30 percent for 2008. That means if you had invested $100,000 in the DOW index in January, your portfolio would be worth less than $70,000 by year-end. If you were unfortunate enough to need this cash and sold your positions you would have locked in these losses. However, beginning in March of this year we saw a nice rally in the markets. From March 9 through March 30 the DOW rose about 20 percent. If you had borrowed this money at, say, 5 percent, from December through March it would have cost you about $1,250. In this scenario, credit has just saved this investor a lot of money. The same investment scenario might also apply to real estate investments. Sometimes it makes sense to establish a line of credit rather than sell depressed investments.

Often, the most ready source of credit can be had by tapping in to the equity of your home. Many banks offer these with little or no upfront fees. They’re not as plentiful as they were in the past, but banks still prefer lending with collateral, and the house you occupy is still considered some of the best collateral. A home equity line of credit permits you to pay interest only when you use it, and in many cases, there are no annual fees for maintaining a line. It’s a nice insurance policy for emergencies.

How should one go about evaluating one’s investment portfolio?

The solvency of many organizations is in question right now. Many well-known companies are at risk of meeting obligations to their bondholders. Many stock prices have dropped by as much as 50 percent. If you haven’t had a professional evaluation of your portfolio, now is the time. You should work with a qualified investment adviser. Most of our clients feel more comfortable working with someone who is compensated by a fee versus a commission.

There are many ways to identify a skilled investment adviser. One of the most respected professional designations is something called a Chartered Financial Analyst, or CFA. This is a three-year program that requires one to study for and pass three levels of rigourous exams.

What advice would you give to someone who has available cash on hand?

Establish an investment account and devise a strategy. By this I don’t mean dump all of your cash in equities tomorrow. Rather, position yourself for a quick entry so that you can take advantage of a market recovery. Bear markets are generally followed by bull markets, which means at some point we will see a significant recovery and you want to be ready. You also want to have a sell strategy. It’s not enough to pick good investments and wait. Investors and their advisers need to constantly monitor the quality of their individual holdings as well as the surrounding economic conditions.

What qualities should an investor look for in a portfolio manager?

This is an excellent time to interview managers. Ask them to describe how they fared during this difficult market. Does the manager have a well-defined investment process? The traditional buy-and-hold strategy hurt many investors over the past couple of years. Managers who focus on evaluating asset classes — as well as the risk-reward profile of those asset classes — have fared much better.

Sandro Rossini is senior vice president, regional manager of Wealth and Institutional Management at Comerica Bank. Reach him at (415) 477-3212 or sandro_rossini@comerica.com.