Portfolio allocation in unstable times

In these times of economic uncertainty, we need to review our investment portfolios to ensure that we can weather the economic storm with minimum or no wealth attrition. Which assets can retain their value despite economic slow down, high inflation, low return on investments, and currency devaluation? Do we concentrate on the few asset classes that are thriving now or do we diversify our portfolios so we can spread the risks associated with investing in any asset?

In “normal” times, portfolio allocation is guided by the investor’s age, risk appetite, ethical values, return of investment (ROI) of each asset, and the tenure of the asset.

Age is critical to portfolio allocation. A person who is already in retirement is now totally reliant on his investments as his main source of income. Such a person’s portfolio should have more products that can easily be converted to cash. Fresh investments in real estate (for build to rent purposes) may not deliver sufficient return on investment in the investor’s lifetime.

The individual’s risk appetite determines whether she has the emotional fortitude to bear changes in the market that could affect not just the ROI but the principal investment itself. People with lower risk appetite (this is evident from one’s ability/ inability to remain calm during fluctuations) should allocate more of their portfolio to low-risk assets like money market instruments and real estate.

Our ethical values dictate how comfortable we are with investing in companies whose products may be harming people’s health or the environment. Other companies may have good products, but their management practices are abhorrent, for instance, they may be known to exploit their workers. Once we identify such companies, we do not invest in their equities.

ROI is one of the most critical considerations in portfolio allocation. We need to fill our portfolios with assets that deliver high returns. However, we are all aware of the saying – the higher the risk, the higher the return. Higher yielding assets usually come with higher risks. Therefore, we should employ the risk-return trade off and invest in assets that deliver sufficient returns within our individual risk profile.

Investment tenure also influences portfolio allocation. A good portfolio should have assets of all tenures – short, medium, and long term; except for our senior citizens who may not need to retain long tenured assets in their portfolios. Longer tenured assets usually give higher returns, but they are notoriously illiquid (not easily converted to cash), and so cannot help during an emergency. Short term assets like fixed deposits and government treasury bills are easily converted to cash but yield low returns. Therefore, we need a combination of all tenures.

From our discussions so far, we see that portfolio allocation is peculiar to each individual.

Do we then find the investment that “ticks all the boxes” and put all our money into it? Certainly not! Every asset class, no matter how good has its associated risks. Therefore, we must spread our risks by investing across different asset classes and in different assets within each asset class. This achieves the following: spreading of potential risks associated with different types of investments, spreading of income flow so that income can be generated throughout the year, investing in high yielding and not-so-high yielding investments and so have a good average ROI, investment in inflation resistant assets and protection from currency shocks.

A balanced portfolio considers all these factors in “normal” times, but these are not “normal” times therefore, we need to exercise additional diligence in reviewing our portfolios against the potential eroding factors. Firstly, inflation. Are the assets in the portfolio able to deliver higher returns than inflation? If not, should we divest from some of them and invest more in real estate and inflation-indexed mutual funds? Next, low ROI. Are there higher yielding, safe investments that we could buy? Do we divest from treasury bills into crowdfunded projects? Then,  currency devaluation. Should we invest some of our funds offshore in order to balance out the eroding effects of devaluation? Or maybe even consider FX trading and cryptocurrencies? Economic slowdown is affecting the whole economy. Really? How come some commercial banks are paying higher dividends than they have ever paid despite the lockdown last year? Should we allocate more of our portfolio to stocks that seem immunised from economic slow down? It is time to answer these questions and act on their answers to restructure our investment portfolios. When the economic tide changes, we will carry out another assessment.

Whilst reviewing and restructuring, do not forget the original principles – tenures, ROI, liquidity, and risk profiles of the new assets. Happy  investing.


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