Should you diversify your portfolio in times of uncertainty?Hampton Wealth
Modern civilization isn’t new to the concept of instability, with depressions, global recessions, wars, plagues and many other problems in the past significantly affecting physical and financial health. Should you diversify your portfolio during such times?
The coronavirus outbreak has been declared a pandemic by the World Health Organization. With instability in the U.S. economy and damage rippling out to the rest of the world, the stock market is hitting lows that haven’t been witnessed since the 1987 market crash, and industries across the board are downsizing.
Could this derail your wealth management plans?
There are many questions on the minds of the masses. One of the big finance-related questions on the minds of investors pertains to diversification.
Is it a good idea to diversify your portfolio in times of crisis?
Don’t fiddle with your investments right now
Many advisors are of the opinion that you need to leave most – if not all – your investments alone when times of volatility and instability emerge. Wealth building revolves around the idea of minimizing as much risk and uncertainty as possible. Making huge changes to your portfolio now goes against that basic objective. Instead, consider that this might be a good time to reevaluate your goals and to try to make sure your investments are aligned with these goals. If, for instance, your short term goal was to purchase a new property but the new market drop feels too dramatic and makes you uncomfortable, then think about how you would adjust your strategy once things wind down.
Choose safety over excitement, always
Now is the time to see what investors are really made of. Take legendary investor Warren Buffet for example. Buffet decided that he isn’t willing to chase a few extra points of return if it means increasing the possibility of Berkshire’s ruin. As an investor, you need to keep this trade-off in mind, especially during difficult periods. The choice will usually boil down to assessing the opportunities and risks associated with a decisionin front of you, and a person that does not control risk is likely to make bigger mistakes. If you think you found easy excess returns with little or no risk, then it’s likely you’re wrong.
Diversifying through alternatives
While over-action is a bad idea in times of crisis and you should leave most of your investments alone, diversification may be possible through alternatives. Alternatives are legitimate investment vehicles that could reinforce your portfolio by adding proper diversification. The main idea with alternatives is that there is a good redistribution of risk such that your returns won’t be so correlated or dependent on stock market performance. In a nutshell, alternatives help provide a buffer against economic uncertainty as well as steep declines and volatility in the stock or bond market.
Alternatives are good crisis cushions
Real estate, tax liens, precious metals and cryptocurrencies are examples of alternatives. The key to investing in alternative assets is to start small. Eventually, once you have found your footing and done your research, the plan is to diversify across a wide variety of asset classes. Variety is the crucial component in alternative investing because this means that returns are maximized and price volatility might not affect you as much.
Don’t panic sell
Think about reviewing your portfolio of investments and consider restructuring where possible. Over time, risk perception and risk capability shift and it’s important to know how much risk you can bear. Investments in the stock market warrant a long-term outlook with an investment target in mind. You are just crystallizing your losses by selling in a bear market amid so much confusion.
Bite into real assets
A distinguishing characteristic of real assets is that they are ‘true’ or ‘tangible’ assets, and they provide ownership to a store of value. Natural resources, infrastructure, and real estate are the three main financial asset classes. They can retain value in inflationary environments.
Overall, if you’re thinking of diversifying your portfolio during this coronavirus outbreak (or in other times of crisis), take note. Diversification does not have to be done the way you might do it in more stable times. Alternatives, real assets and a focus on safety could help you make it through volatile times.
Hampton Wealth specialises in sourcing high quality, listed bonds and funds with a focus on providing returns in excess of normal off the shelf investment options.
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