If you’re a high-net-worth investor or family office, chances are you’ve benefited handsomely from the equity bull market of the past decade. Staying long US large-cap indices has been the winning strategy. Mega-cap tech, AI narratives and index flows have done the heavy lifting.
But as the old saying goes: “Pigs get slaughtered.” Staying too long at this party may be playing with fire. Unlike benchmark-tied superannuation funds that must run with the herd, family offices and private investors enjoy something more valuable: flexibility.
At today’s valuation extremes, flexibility isn’t just an advantage – it’s a weapon.
David Rosenberg (Rosenberg Research) has been clear: “Starting valuations determine future returns. Overpay and you borrow from tomorrow’s performance.”
David Collum (Cornell University) is even blunter: “Mean reversion is undefeated. Every cycle resolves the same way – painfully.”
From these current US large-cap levels, history points to potential 30 per cent–60 per cent draw-downs when valuations normalise.
Timing is unknown, but at least you can apply some practical suggestions (below) to protect the massive gains enjoyed over recent periods.
The problem with today’s market positioning
The crowd has gone all-in on one story:
- Long everything AI and mega-cap tech.
- Assuming lower interest rates will justify valuations.
- Underweight duration (convexity), leaving portfolios exposed.
But technology’s cash flows are most sensitive not to the Federal Funds rate, but to 5–10 year Treasury yields. If those back-up – even modestly – the maths underpinning today’s valuations falls apart. Add-in record debt loads, slowing global growth and rising unemployment risk, and the AI-driven optimism starts to look fragile.
As Rosenberg has warned: “Cycles don’t die of old age; they die of excess and of policy error.” Right now, excess is everywhere, and the margin of safety is gone.
At a minimum, we should be positioning ourselves closer to the fire exit – in case someone yells “fire!” in this crowded theatre.
Why HNW and family offices are different
Superannuation funds and many retail advisors are forced into benchmark hugging – career risk punishes deviation from the herd’s strategic allocation benchmarks. But family offices and private investors have a mandate that’s very different:
- Preserve capital first.
- Maintain liquidity.
- Wait for opportunity.
Collum often reminds readers in his recommended Year in Review writings:” those who keep cash and courage in reserve buy assets at generational discounts when the herd is forced to sell.”
Suggested positioning adjustment ideas now (not financial advice)
If you believe the laws of gravity still apply, consider these moves:
- Protective hedges / Long-volatility exposures (especially if you are avoiding duration)
- Replacement trades – e.g. Equity call strategies and reduction of physical exposure
- Alternative return streams – ( High quality private credit, selected hedge fund strategies, top-tier private market plays)
- Listed growth alternatives – listed property, listed infrastructure, equally weighted indices have less stretched historical valuations versus large-cap indices
- Diversified equity exposures – small-cap value, lower-volatility strategies, fundamental
- Geographic diversification – lower valuation multiples in places like Japan, China, emerging markets and Australia
- Liquidity discipline – re-balance more frequently from equity ‘wins,’ to diversify
Case Shiller PE
The bottom line
Yes, AI will deliver real productivity gains. But as Rosenberg and Collum both emphasise, the narrative always collides with valuation gravity. Debt, demographics, slowing global growth, and the sensitivity of tech to long-term rates make today’s optimism precarious.
For family offices and HNW investors, the choice is clear: chase the herd a little longer, or preserve capital and prepare to be a buyer when mean reversion resets the playing field.
History shows who wins: those who step aside before the cliff, not those who run with the sheep.
Michael Armitage CAIA is principal of Fundlab Strategic Consulting Pty. Ltd.
Disclaimer: This article is provided for informational and educational purposes only and does not constitute financial product advice, investment advice, or a recommendation to buy or sell any security, derivative, or investment strategy. The views expressed are those of the author and are based on information believed to be reliable at the time of writing, but no representation or warranty is made as to accuracy, completeness, or fitness for purpose. Past performance is not indicative of future results. Readers should seek their own independent legal, financial, tax, or other professional advice before making any investment decisions.