There is nothing more certain than the eventuality of change. The past few months have provided plenty of uncertainty for investors. Careful planning can help you achieve investment success.
Unexpected political events and environmental changes are ever-present but recent months have given an extra dose. The COVID-19 pandemic and supply chain issues are still creating uncertainty in the markets. The situation in Ukraine is another major event currently influencing market conditions.
So what strategies should you implement to protect your investment portfolio against uncertainty?
1. Diversifying your portfolio
The most obvious, and unsurprising piece of advice is to diversify. Diversification offers simple and lucrative opportunities and allows you to spread risk and ring-fence your portfolio from disruptors. From a practical perspective, considering foreign and domestic investment in addition to spreading your investments across different asset classes and within classes is advised.
Corbin Blackwell, a senior financial planner with Betterment, pointed out an interesting truth about diversification. Blackwell told TIME that diversification isn’t about having more assets in your portfolio. Blackwell said, “Good diversification is having different areas of the market that don’t behave the same”. Assets in the UK market, for example, behaved differently to the US assets in the aftermath of Brexit. Successful portfolios include a mix of real estate, stocks and bonds and are more risk averse. When it comes to growing a property portfolio in particular, it is worth investing in both student and residential property types for example.
Successful investors also look at alternative investments as a diversification tool.
2. Preserving liquidity
Liquidity is especially important when considering property portfolios. The ability to convert any asset to cash or to be able to buy or sell a security without losing out on price is important. Common strategies to ensure quick and easy property liquidation include:
- Real Estate Investment Trusts (REITs)
- Viable tax schemes, such as depreciation
- Bundled property portfolio sales
- Refinancing of debt
Each approach, however, is not without its pitfalls. Spending enough time exploring options and considering the most viable route is therefore critical. Matt Goldberg, chief investment officer at Marchant Capital Group, suggests investors quantify the liquidity of an asset and assign value to it rather than simply considering whether something is easily liquidated or not.
Large property portfolios must also be ready for sale or, indeed, purchase. For that reason, investors should pay attention to the buy/hold/sell cycle in order to be able to react quickly to market conditions. This is when investing in a highly functional, purpose built virtual data room to hold asset documentation is worthwhile.
3. Creating a portfolio and investment strategy you’re comfortable with
Having a clear investment strategy can help ride market uncertainty. If you know your objectives, desired rewards and your tolerance for risk, you can better identify the right assets for your portfolio.
The American Association of Individual Investors (AAII) recommends a comprehensive portfolio review strategy to align your own investment style with your portfolio. Their proposal involves:
- Analysing your situation and determining how much time and effort your portfolio review requires
- Reviewing your investment portfolio performance in short and long-term targets
- Measuring your investment performance and results in light of risks associated with the portfolio
- Revisiting your investment objectives to see how well they align with your portfolio and its current performance
- Performing attribution analysis on each investment in the portfolio
- Considering and re-considering your investment strategy and taking special note of your exit and entry strategies
- Revisiting your strategies based on your investment approach – e.g., defensive or offensive ways of approaching the market
- Finding the areas you want the portfolio to improve upon and making necessary adjustments
4. Playing defensive and hedging your investment portfolio
A defensive approach, which can be particularly helpful when considering property portfolios, typically involves the:
- Reduction of leverage
- Refinancing of existing borrowing
- Broadening of lender numbers
- Limiting of cash commitments
A big part of defensive investment is not to sit on your investments and wait for market uncertainty to subside but rather hedging against investment risk (investing in one investment to offset risk in another).
5. Protecting your portfolio with comprehensive management
There’s no running away from market uncertainty. However, you can limit your exposure to volatility and uncertainty with comprehensive management.
Proper portfolio management requires the right people and tools. Portfolio management built on authentic communication will weather the storms of market uncertainty. With tools like the Drooms LIFECYCLE data room, you maintain comprehensive dialogue between the key players.
Speed, transparency and security are the keys to portfolio management, especially in uncertain times. You want to find information quickly and the real-time search functionality can make it easy to scour thousands of asset files. Auto allocation indexes all incoming data files without problems. With advanced permission, you control information flow. Features such as two-factor authentication and encryption guarantee your investment portfolio stays secured.
By diversifying your assets, preserving liquidity and hedging your investment portfolio you can create an investment strategy that works for you. Choose the right tools and partners to align with your investment goals to move closer to investment success.