No one likes a bear market. And the last few days have been pretty rough on most of our investment portfolios.
But what if I told you that the dream of a stable portfolio can be fulfilled, even amid this volatility?
Why are the markets so volatile?
The capital markets are known to be one of the most volatile asset classes throughout history. Minor fluctuations of +-1% are a common scene, but extreme volatility is an inevitable sight during major economic/political shifts.
The VIX as depicted below, is an indicator of volatility and the recent surge is attributed to the following factors:
Russia-Ukraine War: Though classified as ‘war’ by many journalists, the attack of Russia on Ukraine and the resulting tension between the 2 countries have caused havoc in the world supply chain, and prices of commodities have surged, especially that of oil. Since oil is a crucial raw material to many businesses, its fluctuating prices bring uncertainty to businesses the economy.
Inflation: Governments and central banks all over the world are struggling to beat the after-effects of Covid-19 lockdowns. However, artificially pushing economic activity by cutting interest rates and providing subsidies is not a long-term solution. They invite a phenomenon called inflation. And inflation is a classic reason known to shift investors’ attention away from the markets towards commodities and safe deposits.
How to stabilize your portfolio, then?
In situations like these, the equity market is the last place you want to be. Enduring the volatility is not everyone’s cup of tea, but there is a work-around.
There are more avenues to keep your money, a way that can help you hedge against equity markets…
Energy/Commodities: The commodity market comprises metals like gold and silver, grains like wheat, and even energy, ie. crude oil. These are mostly traded in the futures, allowing businessmen to secure future prices of these raw materials for their operations. The spot market has also gained popularity lately. Being an input cost to most businesses, they usually move in the opposite direction to stock markets. See below, the surge in gold prices when the Russia-Ukraine tussle began, the same time when stock markets started tumbling. This negative correlation makes them a good hedge, worth adding to diversify your portfolio.
Real estate: Land has been one of the oldest to be recognized as an asset class and probably the most beloved for Indians. Almost any space can qualify as real estate; including houses, apartments, shops, or even pieces of barren land. Capital appreciation of land can be multifold and renting out shops, offices, houses, etc. is a great source of income. You must have heard stories of how people got rich by just flipping houses! But it requires a big-ticket size to get started with and there is also a liquidity constraint. Real Estate Investment Trusts (REITs) presents a solution to this by offering pieces of ownership of real estate they own and manage. They trade just like ordinary shares and offer a dividend as well. Owning some real estate can rid you of portfolio volatility to some extent.
New Age Assets - New age people create new-age businesses which create new age assets. Internet assets like cryptocurrency and non-fungible tokens (NFTs) have created a new wave in the financial world and gathered a fan base of their own. They may have not gained widespread acceptance yet, but they make a reasonably good way for making some profits via trading, given the growing hype around them.
Learn more about new-age assets here.
Maintain a portfolio approach
Just knowing the different asset classes is not enough, you need to navigate through them to build a meaningful portfolio.
Blindly investing when prices are low may work for each asset class individually, but you have to maintain strategic asset allocation to ensure decent returns overall.
The practice of diversifying your investments in the right proportion will help you take advantage of each asset class in a unique way.
Allocating some chunk of money to different asset classes like equity, debt, commodities and real estate helps build a resilient portfolio that ensures stability in the long run.
Pro tip: Actively invest in asset classes you are familiar with, and try delegating other investments to advisors proficient in their respective fields.