Diversify your investment portfolio to ward off risk
An ideal exposure of 5 per cent in the portfolio to the yellow metal would have not only allowed the investors to counter the loss to that extent, but also gain due to the hardening prices. This is why asset allocation involves a bit of exposure to gold in the individual portfolios
In the last couple of months, investors in the equity markets had experienced whipsaw movements and thus their portfolios were subjected to heightened volatility.
It's not just about the sharp market drops, but also the fierce pullbacks, which characterized the markets in the last few weeks. These unpredictable movements in the stock market are difficult to digest and quite unnerving to say the least.
During the worst phase of the fall, some of the concentrated (mid/small cap) portfolios shrunk by more than 40 per cent in their value in less than a fortnight.
Returns are an outcome of risk management and one has to dedicate more energy in doing the latter. The diversification and asset allocation arguably are two of the best risk mitigation tools in investing.
They become paramount to counter market vagaries in these situations. And even within the equity exposure, one may add various flavors of the market.
One has to remember that while many stocks tumbled during the fall, there were some stocks, which also gained. So, having an exposure into these segments of the market not only reduces the losses, but also could enhance the returns of the portfolio.
In the hindsight, we could proclaim to have done certain things to benefit us, but it'll be always difficult to predict something happening.
The only way to gain immunity would be to have a diversified portfolio, which allows us to have a lower risk. So, in the current market cycle, we've seen that financials i.e. banks/ non-banking financial institutions (NBFCs), underperformed which were the main drivers of the earlier cycle.
Though the marketing is correcting, the immediate recovery has been contributed by another set of stocks that included pharmaceuticals.
There was also an uptick in the value proposition, which was an underperformer in the past few years, while the earlier dominant sector (financial) started to reduce weightage in the evolving scheme of things.
The current market recovery has been largely driven by liquidity infused by monetary measures of the central bankers and fiscal policies by the governments.
The gradual opening of the economies from their self-imposed lockdowns have led hopes of early green shoots in economic recovery and an anticipation of early normalcy has energized investors further into riskier assets.
While this has resulted in a bull case scenario in the short term, the medium to longer-term risks remain elevated. Also, in times of uncertainty, defensive strategies come into play and so we've seen a greater appreciation of stock prices of pharma and healthcare sector.
Though the liquidity induced sharp recovery has effectively shrunk the cycle of defensives to value to cyclicals and back to momentum, defensive strategies would still do well in the medium term.
The extended period of business contraction leading to defaults, headwinds in terms of increased infections and the very prolonged nature of the virus impeding growth has made the prices of precious metal to harden up.
Gold, which is considered as a safe haven during the times of economic turmoil, has begun the attract attention from investors, both retail and institutional.
An ideal exposure of five per cent in the portfolio to the yellow metal would have not only allowed the investors to counter the loss to that extent, but also gain due to the hardening prices. This is why asset allocation involves a bit of exposure to gold in the individual portfolios.
To assume any unidirectional movement of stock market is a peril for investors, stock markets seem to recover and at many times are ahead of the actual underlying economic indicators.
History shows that stock prices ultimately recover, but would every investor have the luxury to stay till the recovery is achieved is the moot point. It's important to acknowledge that investing is not binary.
Hence, sticking to the goal-based investing, investors are better off to realign their portfolios at these times than to completely back out of stock markets.
The realignment of assets could be considered on the basis of the risk profile and goal timelines under the supervision of an advisor.
(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at firstname.lastname@example.org)