It has been hard this summer not to become engulfed by the Hollywood algorithmic machine’s epic output on Odysseus. His 21st century makeover has been met with much critical acclaim and Classicists’ derision. We all know the brave hero Odysseus, the cinema goers and more literary among us Telemachus but what of the generations thereafter?
Many of you will be familiar with the concept of mean reversion in the context of it being used as a trading strategy. Put simply, trading opportunities arise when an instrument is seen to have deviated from its historical mean. Often, following an extreme deviation, the instrument’s price has been observed to return towards its previous historical average hence the trading opportunity. What is perhaps less understood is that the phenomena of mean reversion is at play in many other dimensions of ordinary life and by extension in the financial world and perhaps even in the world of the Greek heroes.
Reversion to the Mean and the Great Wealth Transfer
The so called “Great Wealth Transfer” (the estimated more than $100+ trillion to be passed down from one generation to the next in the next twenty years) has been a much discussed topic in the financial press. The concerns of UHNWI and HNWI of how to preserve wealth lies at the center of this transition.
There are oft quoted ‘adages’ and ‘rules’ etc. such as the Williams Group example which suggests that 70% of families lose wealth by the second generation and 90% by the third generation. However, such rules do not stand up well to rigorous scientific analysis and for the most part should be treated as conjecture based on anecdotal, small sample size observation, in a field where data is scant and frequently opaque.
The impact though, of the persistent impression that the children and grandchildren are going to blow it, does create a problem in that it is fear generating for those currently administering the wealth. This contributes to a “fear of losing mentality” which leads to distrust and to poor, short sighted decision-making. Though the idea of preventing loss may be well intentioned, it encourages the failure of the older generation to let go control, and push responsibility onto the younger generation. It also means that investment becomes more risk-off in nature and that the pressure of responsibility on the inheriting generation (if and when they are given control) is to show just how safe and conservative their investing style is.
Missing the Essential
The wealth creating generation (like Odysseus) is usually defined by their dynamism, high risk tolerance and incisive decision-making. All characteristics of overcoming fear, not of being governed by it. Here in lies the element of mean reversion, not quite in the sense that wealth will be lost from one generation to another but more so that the very energy that stimulates wealth creation is the aberration across multiple generations. It is a blip of dynamism in a sea of narrow fearfulness. If the wealth creation moment is just an exception, then naturally across multiple generations it will revert back to its normal state—fearful turgidness.
To prevent this type of scenario, the older generation must loose the reins and actively encourage the younger generation to be brave, run the risk of failure and take the accompanying pressures, overcome them, and succeed. This is the difference between prospering and withering.
What Wealthy Individual Investors Can Learn from Sovereign Wealth Funds
Those who find themselves in the situation of worrying about the preservation of their wealth and passing it to the next generation should study sovereign wealth funds. Why? Because they could benefit from seeing a truly long-term investment horizon in action—the kind that spans many future generations and a perspective from an entity that is specifically responsible for the preservation of wealth for those said generations. How? By growing wealth, not by trying to stop losing it. Simply look at the successful ones’ portfolio portfolio construction.
The Norwegian Sovereign Wealth Fund for example has a portfolio construction of 70% equities, 25% Fixed Income and 5% Real Assets (divided between real estate and renewable infrastructure). By most standards this would be considered quite an aggressive portfolio and yet this is the construction designed to maximize the wealth for the Norwegians of the future. It is very much a risk-on, growth portfolio and it is working.
Preservation Through Growth
Adjusting for inflation, the Norwegian Sovereign Wealth Fund has had a cumulative growth of 210% from 1998 to 2025. That 28 years is effectively a generation of time. It is obviously not without its difficult years, -23% in 2008 and -14% in 2022 but weathering those years in the context of a very long-term horizon is part of the journey.
What AI Trade Decision-making Can Offer
The 70% equity allocation can seem daunting to some investors, who have learned to fear equity markets usually by living through those markets’ painful drawdowns. Consequently, that skews the vision of what wealth preservation means—pushing supposed safety, over more risky growth.
Our own AI Trade Decision-making system is designed to mitigate this pain in equity investing. Making it easier for the investor to stay the course of a long-term investment which benefits from the upside growth, while remaining defensive against pronounced market drawdowns. Our system has illustrated that deploying AI Trade Decision-making on the S&P 500 results in a halving of volatility and quartering of maximum drawdown.
These kinds of characteristic changes to the risk profile of the equity component of the portfolio make it more comfortable for Investors to embrace the sovereign wealth style growth approach. In doing so this allows them to overcome the fear mentality and helps them exceed the aim of not just preserving, but growing wealth for their future generations. ■
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