Markets tend to move ahead of the economy, price in crisis and then move on to capture future recovery. It is high time to be rational and display some long-term patience.
Current times are certainly abnormal as we are amidst a black swan pandemic. One could look at historical archives for an effective strategy to safeguard the financial future. Some investors believe that this is the “END OF THE WORLD”, but a few others prefer to be more realistic and respond with “THIS TOO SHALL PASS”. Markets are made up of 2 emotions, Greed and Fear; and an investor needs to strike a balance between the two. This however is easier said than done during times like these.
The Covid-19 pandemic led market mayhem has been a black swan event and has managed to play with investors’ minds leading to irrational decisions wherein all fundamental and technical thesis were thrown out of the window. This meant that fear had taken centre stage, and not many were aware that this was actually the time to be selectively greedy. Markets tend to move ahead of the economy, price in crisis and then move on to capture future recovery. Thus, investors cannot wait for resolutions of the issues that led to the market fall, as the risk of missing opportunities is very high. It is high time to be rational and display some long-term patience.
Life has changed dramatically in these current times and it has managed to significantly impact multiple sectors of the economy, both positively and negatively. As we prepare for a “new normal” post-pandemic world, there ought to be both winners and losers. We as investors need to be smart enough to sail through times like these. But do we have an easy yet effective way or a set template to get out of the rut? Maybe yes, with the help of a well-diversified portfolio, but it might not be so easy, as it must encapsulate strategic and tactical asset allocations as well, based on the fast-changing economy.
Investors should take a long-term approach of investing and construct a high-quality portfolio as a part of their strategic asset allocation. The proverb, “do not put all your eggs in the same basket” makes more sense during times like these. Investors should cut out the white noise and take a broader view to avoid getting caught up with biased individual stories. A trusted advisor can also help reach the ideal strategic asset allocation keeping in mind the risk profiling of an investor. When it comes to long term investing, only a well-diversified portfolio consisting of asset classes like high-quality equity and debt instruments, offshore investments, safe-haven gold, and other alternatives can serve as a hedge for the unforeseeable future.
But more importantly, it is the act of periodically rebalancing the portfolio of an investor based on tactical asset allocation that could prove to be the most effective and efficient way ahead. For example, when the dollar index was falling, and the interest rates were at an all-time low, going overweight on gold could have helped investors maintain the shape of their overall portfolio as gold is typically inversely related to the dollar index, had the cushion of low holding costs thanks to easy monetary conditions and hence, was bound to make greater highs.
The investors have to be proactive to grab hold of any opportunity that comes their way, as a small tactical change of going overweight or underweight on a certain asset class can make a whole world of difference to their long term portfolio. But they should bear in mind that even with a well chalked out asset-allocation framework, the markets are bound to throw up surprises and only conviction in the investments and patience will serve their purpose.
(The author is Chief Investment Officer (CIO) at Validus Wealth. Views are the author’s own.)