The possibility of losing value during a volatile market prevents most people from seeing the opportunity
Crisis is defined as “a time of great disagreement, confusion, or suffering”. We can agree that increasing inflation, the war in Ukraine and the consequences of the pandemic are making many of us feel all of these emotions at once. Many investors may feel still insecure about investing in a volatile market after having lived through the 2008 crisis and the recession that followed. Even though many negative feelings surround the word crisis, its origins are in ancient Greek, where 'krísis' means “power of distinguishing, decision, choice”. If we want to take a more positive look at it, it can mean a turning point or even an opportunity, if we are able to spot it.
Nonetheless, uncertainty is still the dominating feeling at this moment, and people feel a sense of unease when it comes to making decisions in a tumultuous environment, particularly when it comes to their finances. Behavioural finance, a study of psychology that relates to the economic decision-making processes of individuals, showed that certain behavioural traits tend to affect the decisions that we make, one of these being that people are more loss-averse than prone to take risks. This means that people feel the emotional pain of a loss much more than the pleasure gained from an equal-sized profit. Therefore, the possibility of losing value at the moment prevents most people from seeing the opportunity, even challenging financial advisors.
It is, after all, an unprecedented situation for most of them since nothing like this has happened for about 35 years. In this scenario, many portfolios need to be re-evaluated to protect investors from losing money or their assets from losing value.
Which assets should a portfolio include?
Traditionally, wealth managers would create portfolios with a mix of around 60 % in stocks and shares (also referred to as equities), and 40% in bonds. Equities generate greater profits, but are more sensitive to changes in the market and offer higher risk, whereas government bonds, offering fixed income, provide a balance to this risk. However, old recipes might need to be reviewed in the current crisis to improve their performance.
As bonds are not presently providing high levels of return due to inflation, and since the economic crisis has affected the performance of most shares, investors need to be more creative when it comes to designing their portfolios. Even in this difficult scenario, analysts see a 10-year projection of performance on equities and bonds as quite promising. Other traditional assets, like gold, are still performing favourably, with a steady execution that seems to evolve positively.
In any case, assets like stocks and bonds are still a better alternative than cash savings. If an investor had put their money in a savings account, for instance, £10,000 about 10 years ago, even with the accumulated interest, the account today would have today the equivalent of £7,500. Investing is still the safest choice, and long-term predictions show that investments today will perform generating a considerable profit.
Can we still find investment opportunities at the moment?
Working with a wealth manager, who could foresee how some of these investments develop, is a great place to secure your investment. A portfolio of equities with shares from companies with different backgrounds and from different industries could be a good start. These uncorrelated investments offer more protection from sudden fluctuations.
When it comes to choosing stocks, credit card shares are a great example of understanding how the market is functioning with high inflation. Every time you use your credit card, they make the connection between the shop and the bank. If prices are going up, it means for them also a higher commission, since percentages received for the transaction stay the same. That 10% more you pay due to inflation automatically means your credit card also receives a higher amount, simply because more cash is going through their system. People are spending more due to inflation, so their take automatically increases.
Tech company stocks have been performing strongly in recent years but this trend has reversed during the past year. However, many other companies still offer good growth potential, for example, companies involved in the transition from fossil fuel to non-carbon energy. The hospitality and tourism sectors, which were so dramatically affected during the pandemic, are now recovering. Also, the healthcare, utilities and consumer goods sectors will always see demand.
The current financial market offers great investment opportunities. Since these tend to be cyclical, with stages of growth, peak, downfall and recovery, it is important to recognise the investment opportunities at the right moment.
If equities still feel too vulnerable at the moment, real assets funds could be a better solution for you. Investing in infrastructure development or in property could help you secure a constant return. Properties with rent review that can accommodate the rent linked to the current inflation assure a better return.
If you feel like your portfolio should be reviewed to adapt to the prevailing market, or if you believe there are great investment opportunities at the moment, talk to a wealth manager.
