Everyone feels like a genius when markets go up. Markets have a way of making people feel brilliant. Until they don’t.
If you look closely, the cracks are forming in North America. Valuations are stretched. Debt is piling up. International politics are creating uncertainty. And history tells us what could happen next.
No one knows exactly when a downturn will hit us. But one thing is certain: when markets shift, the investors who ignored basic risk principles are the first to fall.
The best way to avoid being one of them? Follow three fundamental portfolio rules:
- Always maintain enough liquidity to weather any market condition.
- Only take on as much investment risk as you can comfortably manage in a downturn.
- Constantly track and control exposure to concentrated positions (like Nvidia).
These rules aren’t theoretical - they come from history. And the people who broke them paid the price, including some of the best investors in the world. Read about them below.
Liquidity: The LTCM Collapse
Rule #1: Always maintain enough liquidity to weather any market condition.
In the 1990s, Long-Term Capital Management (LTCM) wasn’t just another hedge fund - it was the hedge fund. It was run by Wall Street’s best and brightest, including Nobel Prize-winning economists. Their models were sophisticated, their strategies airtight. And for a while, they were untouchable.
At its peak, LTCM controlled $126 billion in assets - but only $4 billion was their own money. The rest was borrowed. Their models assumed that markets would always return to normal, no matter the disruption.
Then, in 1998, Russia defaulted on its government debt. Investors who had lent money to Russia panicked, selling anything they could to raise cash. But buyers disappeared. Markets froze. Liquidity dried up.
LTCM, heavily leveraged and caught in the chaos, found itself trapped. As losses mounted, Wall Street scrambled. The Federal Reserve had to arrange a $3.6 billion bailout to stop the collapse from taking down the entire financial system.
Liquidity isn’t about maximizing returns - it’s about survival. Investors need cash or easily accessible capital, not just in good times, but when everyone else is desperate for it.
Market Risk: The Archegos Collapse
Rule #2: Only take on as much market risk as you can comfortably manage in a downturn.
Archegos Capital looked like a massive success. Its founder, Bill Hwang, had grown a small investment firm into a financial giant, using borrowed money to control $100 billion in stock market bets.
The strategy worked - until markets turned.
In early 2021, interest rates were rising, and investors became more cautious. Stock prices became unpredictable, and big price swings made lenders nervous. Archegos had borrowed heavily to amplify its bets, assuming the market would stay stable. But when stock prices started falling, the firms that lent Archegos money panicked. They demanded it put up more cash to cover potential losses - something called a margin call.
Archegos didn’t have the cash. Its lenders had no choice but to sell off its investments quickly, which flooded the market with billions in stock, driving prices down even further. The losses spiraled out of control. In just a few days, $30 billion in market value disappeared, and some of the world’s biggest banks lost billions.
The takeaway? Market risk isn’t just about owning the “wrong” investments - it’s about being too exposed when the entire market turns volatile. If you’re over-leveraged or overcommitted, you can be forced to sell at the worst possible time, turning a downturn into a disaster.
Concentration Risk: The WeWork Implosion
Rule #3: Constantly track and control exposure to concentrated positions.
For years, WeWork wasn’t just a company - it was a phenomenon. Investors lined up to fund Adam Neumann’s vision of turning office space into a tech-driven, community-powered revolution.
At its peak, WeWork was privately valued at $47 billion. But when it tried to go public in 2019, investors finally looked at the numbers.
The reality? $47 billion in long-term lease obligations but only $4 billion in committed revenue. The company was hemorrhaging money - losing $219,000 per hour - with no clear path to profitability. Worse, its CEO had a web of self-dealing transactions, borrowing against company assets and leasing WeWork properties he personally owned.
The IPO collapsed. The valuation crumbled. Investors lost billions.
Concentration risk isn’t just about one stock - it’s about overexposure to any single investment, industry, or leader. WeWork’s backers, including SoftBank, put too much faith in one idea and ignored the warning signs. Families managing significant wealth must ensure no single asset or decision-maker has the power to derail their entire portfolio.
The Bottom Line: Intelligence Isn’t Enough
Brilliant people fail. They fail when they assume liquidity will always be there. They fail when they overestimate their ability to manage risk. They fail when they let concentration blind them to danger.
History shows that wealth isn’t just built - it’s protected. The investors who survive downturns follow three core principles:
- They maintain liquidity, so they never become forced sellers.
- They limit market risk to what they can handle in a crisis.
- They avoid concentration that could wipe them out.
Markets feel safe until they aren’t. The best investors prepare before the storm.
Have a personal question about your portfolio?
Contact us athello@vijaywealth.ca- we’re here to help you navigate this evolving economic landscape with confidence and clarity.
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The information contained was obtained from sources believed to be reliable; however, we cannot represent that it is accurate or complete. This is a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any securities. The views expressed are those of the author and not necessarily those of Raymond James Ltd. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
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