Protecting your portfolio from market uncertainty

25. October 2019

Uncertainty continues to plague markets. Although there is nothing more certain than the eventuality of change, successful investors are those who prepare for it.

Shifts can occur for a variety of reasons. As we often witness, unexpected political and environmental changes can rattle the system and sent shockwaves worldwide impacting trade and investments.

So what are the best strategies to protect your investment portfolio against uncertainty?

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.

Diversifying geographically ensures a portfolio isn’t overly exposed to dips and dives in the market. Consider, for example, the situation with Brexit, which is having different ramifications in the UK than it is in the US. To count for these domestic uncertainties, widening the portfolio internationally can help.

Typically portfolios that include a mix of real estate, stocks and bonds are more risk averse. When it comes to growing a property portfolio in particular, it’s worth investing in both student and residential property types for example.

The key to success is to consider your personal appetite for risk and determine the investment objectives you have. Patrick Connolly, chartered financial planner at independent financial adviser Chase de Vere, told the Financial Times, “Nobody can consistently predict which asset classes or sectors will perform best. It is therefore important that investors don’t try to be too clever [in their portfolios]”.

Alternative investments have become key to diversification and protecting an investment portfolio from uncertainty. Student housing, build to rent and retirement homes sectors in particular are set to grow.

Preserving liquidity

Investment portfolios must also have a degree of liquidity. 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.

Liquidity will depend on the type of investments held, the investment vehicles used, and the reasons for investing. 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.

Liquidity is especially important when considering property portfolios.  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.

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.

Creating a portfolio and investment strategy you’re comfortable with

It is possible to ride market uncertainty and come out the other side unscathed. This doesn’t always involve becoming more profitable but can, for many, mean surviving without suffering big losses.

Begin by identifying your investment strategy and examining your goals. Consider rewards, the timeline for achieving your objectives and assess your tolerance to risk.

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 make necessary adjustments

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). Hedging works best for those portfolios with short-term objectives.

In the words of Hamilton Reiner, manager of the JP Morgan US Hedged Equity fund, however it’s worth noting that “you can’t have something for nothing”.

Protecting your portfolio with comprehensive management

Market uncertainty is inevitable. One of the best ways to protect against risk is to make sure you’re managing your investment well. For some investors, this means working with the right investment advisers and partners in order to reap the rewards. When choosing an advisor or investment fund manager, the key is to align strategies and objectives.

However, if possible, investors should also maintain a degree of control and involvement in the management of their portfolio(s). Investors ought to have a clear plan in place both for the short and long term. Plans should be revised according to market changes in order to stay on top of developments and their possible impact.

In terms of portfolio management, finding the right tools can play a big role in ensuring success and creating authentic relationships between investors and portfolio managers. The Drooms PORTFOLIO data room does this by providing a single platform for all assets under management. The leading-edge solution, built with artificial intelligence, creates a secure online database in which documents can be accessed and updated on a consistent basis helping to eliminate siloed work processes, provide a consolidated approach to portfolio management, deliver process automation at scale, increase transparency and minimise risk.

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