How family offices can stay immune to market volatility: our advice

Volatility is a worry for investors paid on mark-to-market. Families do not have to be. With the right posture, a family office can treat volatility as a feature of the environment rather than a threat — buying when markets fall, lightening when they rise, and most often doing nothing at all.

The advisory industry periodically warns families that they need to "brace for volatility." The framing misses what a family actually is, and what a family office can choose to be.

Volatility is an institutional concept. It matters intensely to anyone who lives and dies on mark-to-market — fund managers on tracking error, banks on daily VaR, professional investors whose results are reported quarterly. Families are not reported on quarterly. They are not paid on tracking error. They do not need to mark an asset to market unless they need the cash.

And families rarely need the cash — provided the family office is built to make that true. Our advice to families is to actively engineer that immunity, rather than assume it. In practice, that means a few clear principles:

• Size the cash position to real family needs, not to market nervousness. A family office that holds enough liquidity to fund its commitments for the relevant horizon never has to sell into weakness.
• Write the investment policy as though tracking error did not exist. Because, for the family, it does not. The reference point is the family's long-term preservation and growth target — not the index, not peers, not the quarterly headline.
• Pre-decide how the office behaves in a drawdown. When markets fall, a family with patient capital should be on the buy side, not the sell side. That stance is far easier to hold when it has been agreed in writing, in calmer weather, rather than improvised in a panic.
• Pre-decide how it behaves in a rally. When markets rise sharply, perhaps it is time to lighten. Again — easier when the rule has been set in advance.
• Protect the family from advisers whose business model depends on volatility. Politely, but firmly. Anyone whose income rises when the family transacts has an incentive to make the family transact. The family office's job is to filter that out.

The underlying principle is simple. For a family office, volatility is closer to a feature of the environment than a threat to the portfolio — but only if the office has been built that way. Built differently, the same volatility becomes a recurring source of bad decisions, made under pressure, against the family's long-term interest.

Link to original post