Two of the most common questions among new and seasoned investors are “when is the right time to invest” and “how to best manage the assets in their portfolio for a good return.”
We have prepared this article to help you develop reliable strategies to safeguard your assets and protect their value, more so when economic indicators seem quite unpredictable.
#1. Diversify Your Investments – A Good Mix Of Assets
One of the notable investment lessons from the 2018 collapse of the stock market is that assets in different categories and markets respond differently to changes in the economic landscape. It is better to allocate long-term investment capital to a combination of assets in different classes sectors and geographical locations.
Examples of asset classes you can consider in your portfolio include equities, bonds, real estate, commodities and futures. Experts say there is minimal correlation or negative correlation between assets in different classes or categories. For instance, under certain conditions in a market, the value of real estate could be constant or rise when stock prices are falling.
There is limited risk exposure to one asset in a diversified portfolio, whether shares, bonds, or property are owned directly or through a fund. When the market falls, a loss in the bonds segment can be offset by a gain in the property, equities or commodities market.
Another diversification benefit is that the investment portfolio will have a higher return in the long run compared to a single asset held by an investor.
Ensure you diversify the portfolio deeper within each asset class. For instance, when allocating investment capital to stocks, consider putting your hard-earned money in the right mix of big, medium and small companies and those in distinct commercial sectors. If you’re looking for a good example then the anatomy of a good company: HelloFresh is one to watch.
Another way to diversify is to invest in assets in different geographical locations. Suppose a portfolio holds performing assets all over Europe. In that case, it will be easier to absorb losses caused by country-specific threats to an economy, such as the withdrawal of the United Kingdom from the European Union.
#2. Seek Professional Advice
Professional investment advice is never more vital for investors than when economic conditions are most erratic. The main goal of a financial advisor is to help investors put up a strong asset portfolio to bear tough economic conditions and yield good returns in the long run.
As an investor, the quality financial consultancy provides you with professional investment guidance, supported by day-to-day analysis of the key economic indicators. Additionally, professional financial advisors help investors manage their emotions so their personal feelings do not impact the necessary decision making for risk management and wealth maximization.
The advisor will listen to your needs and preferences and help you tailor an investment management strategy detailing when to buy, hold and dispose of an asset. Additionally, you will learn to identify when and how to adopt a different investment strategy or why your portfolio may need rebalancing.
#3. Determine Your Appetite For Risk
Another objective of a financial expert is to help investors determine how much risk they are willing to take to achieve their investment objectives. To an investor, the right amount of risk in an investment is a balance between expected returns and the threats likely to hinder the investment goals.
Worthy to note, the importance of determining the amount of risk an investor is ready to pursue, retain or take is greater when the investor undertakes a DIY approach without professional input from a financial advisor.
Also, note that investors’ perception of risk is likely to change depending on market current and expected performance. Many people will take on more risk when the economy is expanding, and opportunities to make money are numerous, and less risk when the economy is depressed.
Regardless of the economic times, investors need to make capital expenditures at a risk level they are comfortable with. However, the investor needs to determine their risk appetite during hard/uncertain economic times.
If you have embarked on an investment journey without a financial advisor, please follow this Money Advice Service guide to start.
#4. Rebalance Only When It Is Necessary
It is common for commercial assets to lose or gain value when market conditions change unpredictably, thereby unsettling a balanced portfolio.
For instance, assume your asset portfolio partly consists of an investment in the technological sector and another proportion for the leisure and entertainment business. In such a case, the portfolio will be unbalanced when the performance of the two-sector investments happens in completely different ways.
The value composition of the two sectors in the portfolio will differ when one asset expands and the other contracts beyond what could have been anticipated. You end up with a proportion of your portfolio for each sector being more or less what you had intended.
To rebalance your portfolio, you will sell off the assets whose composition has surpassed the allowable limits or buy more assets where your portfolio has less.
Why is rebalancing important? Rebalancing of the portfolio helps investors maintain the amount of risk they had initially planned for at the onset of the investment journey. Additionally, rebalancing helps avoid exposing a single asset to too much investment risk, especially when the risk is limited to a certain asset class or geographical location.
However, rebalancing an investment portfolio needs a good mastery of investment skills and experience. Investors should only carry it out in selected cases and with consultation with a trained financial analyst.
It is not always right to sell off your portfolio or single asset simply because it has unexpectedly lost value. Rather, you should be focused on the long-term horizon, which is almost always necessary for the steady growth of your asset and portfolio wealth.
A financial adviser is useful in helping an investor develop a balanced portfolio where no asset is over-represented or duplicated; you do not want to hold all your assets from the same geographical location, market sector or similar companies.
#5. Invest Frequently
The best way to manage investment risk when the markets are unstable is to invest small amounts of capital at regular intervals. On the other hand, it is riskier to wait for favorable market conditions to kick in before making much bigger capital investments in one or a few lump-sum payments.
Another advantage about investing regularly is that the investor benefits from what is known as pound cost averaging or “drip-feeding”. To illustrate, if you need to invest $1,200 a year from now, it is better to invest $100 every month for one year than make a single payment of $1,200 “when the time comes.”
How does pound cost averaging help? This phenomenon helps an investor purchase a high volume of an investment when the prices are falling and buy less when the prices are going up, thus countering the effects of price volatility.
Additionally, investing at a regular interval helps eliminate human proclivity to predict or speculate future prices in the market, which is a precursor for poor decision-making for investment management.
According to researchers in behavioural economists like Richard Thaler, our investment strategy is greatly hampered by cognitive biases and other thinking errors that often lead us to invest or exit the market at the wrong time.
Examples of biases include loss aversion bias and disposition effect. Loss aversion is a cognitive bias where the investor’s fear of losing the capital feels considerably greater than the pleasure of realizing the investment’s returns.
On the other hand, the disposition effect describes an investor’s tendency to prematurely sell off the assets that have made a financial gain and hold on to assets that have lost value.
It is best to automate the process to make regular capital injections towards their investment to avoid falling into such thinking errors that dent an investor’s decision to buy and sell during uncertain times.
#6. Take Keen Note Of The Safe Havens
Managing risk in an unpredictable economic environment may require the investor to include safe assets in their portfolio to boost returns.
Examples of safe assets in the financial market include government securities (bonds), called gilts in the United Kingdom. Highly-rated corporate bonds are another example of assets with considerably less risk compared to company shares.
It would be best to contact a professional financial advisor to guide you on the ideal safe assets to provide the needed balance to your portfolio.
#7. Reserve Some Cash At Hand
It is always best to reserve cash to meet short-term needs, so you are not overly reliant on the performance of your investments. You will need cash at hand for personal use, more so during unstable economic periods.
It is not recommended for an investor to have to liquidate their assets before the reasonable maturity date. According to experts, the minimum recommended investment in a business or company duration is five years. Also, financial data shows that the effects of market volatility are greatly reduced by holding investment assets for longer than five years.
Holding some cash in your hands for short-term requirements will reduce the financial pressure of holding stock assets and wanting immediate returns during uncertain economic conditions.