6 ways investors can react to the current situation

6 ways investors can react to the current situation

In times of conflict, like these, it is common that it also affects the financial markets. In general the current situation is very difficult to predict, so make sure that you make an investment strategy that allows you to sleep well at night and then stick to it. Based on that, here are some ideas on what you can do if you are worried about your portfolio.

1. Time in the market vs. timing the market

   In turbulent times it is a natural reaction to consider selling your holdings and leave the market. But in the financial world there’s a saying that it is better to have long time in the market than trying to time the market. What it means is that it is very difficult for anyone to know when to jump in and out of the market. Missing the good days is usually more expensive than being in the market on the bad ones. The other option is of course to only turn some of your portfolio into cash, which could be a durable solution as well. But just bear in mind that inflation is high and interest rates low, which means that your purchasing power over time is going to fall, if you have your savings in cash.

2. Diversify your portfolio

   It is always a good idea to spread your investments, but especially in times of conflict, where the risk of economies suffering – especially in Europe this time – is high. Therefore it makes sense to both look at diversification when it comes to different asset classes, but also on geographical regions and industry sectors. When you diversify your portfolio, you lower the risk that one global event will have a massive impact on your entire portfolio. History also tells us that you don’t give up a lot of your long-term performance by diversifying.

3. Consider sovereign bonds and currencies as safe haven

   In times of turmoil, it can make sense to turn towards the investment assets that are least likely to be affected by what happens. So if you decide to diversify your portfolio, bonds is one place to look. While the idea of a bond is simple, figuring out what to put your money into is difficult because of the complex macroeconomic backdrop. In times like these diversifying is about spreading risk and as such the volatile landscape suggests that you look for long-term sovereign bonds (+7 years) from countries such as the US Treasuries and German Bunds. Another place to look for safe haven is in currencies such as US Dollars, Japanese Yen and Swiss Franc.

4. Protect with commodities

   Commodities have been a hot topic for the past year and they have only become more prevalent in this situation. While there’s going to be volatility within specific commodities like e.g. oil, broad commodity indices could work as a hedge for both the conflict as well as supply squeezes, interest rates and inflation. It is, however important to note that the current geopolitical landscape means that there’s risk and volatility within almost all commodities. So focus on the broadest possible indices and don’t put all your eggs in the commodity basket, as it will then move from being a hedge to a risk.

5. Focus on stable equities and momentum

   Defensive stocks, such as healthcare should generally be hit less than e.g. cyclical stocks when economies suffer. Also mega caps, i.e. large companies should weather the storm better than smaller ones.

6. Defence and cyber security could have upside for the risk-takers 
   There’s going to be a lot of volatility and turbulence on the market in the coming time, but for risk-willing investors looking for sectors with potential upside, it could be argued that defence stocks as well as cyber security stocks should fare well in the coming weeks.

Stay safe
Philip Frijs
Commercial Owner - Investor