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Wednesday, November 20, 2024

How to Build a Resilient Portfolio in Times of Uncertainty?

By Century Financial in 'Blog'

How to Build a Resilient Portfolio in Times of...
Types of forex indicators Every Investor Should Know

Why Are Stock Markets Volatile During Uncertainty?

Stock markets can get shaky during uncertain times, and there are a few reasons for this. Events like elections, geopolitical tensions, or unexpected economic news can throw investors into a frenzy. When uncertainty creeps in, emotions run up high—fear and optimism can lead to rapid buying or selling, causing wild price swings. Investors often react to speculation, adjusting their portfolios based on what they think might happen next, which only adds to the volatility. Plus, when liquidity drops, it becomes tougher to make trades without affecting prices. Ultimately, understanding these dynamics can help investors stay calm and make smarter decisions when the markets get turbulent.

Understanding these trends is the first step toward building a resilient portfolio.

Understanding Market Trends during Uncertainty

For instance, let us take this example of an uncertain event.

Elections come and go. While short-term volatility may rise around election day, the broader economy and stock markets march on, driven more by fundamentals like inflation, interest rates, and consumer spending than party politics.

Anxiety and uncertainty tend to rise as November approaches. This may explain why market volatility (as proxied by the CBOE Volatility Index, or VIX) has tended to increase notably two months before election day.

By 30 days after the vote, volatility has somewhat subsided, returning to its long-term average around 60 days post-election, as can be viewed in this graph.

Source: Bloomberg

 

The chart shows that the months before elections typically experience higher volatility, and the VIX is on a rising trend due to fear or anxiety among investors. However, once the uncertainty diminishes, i.e. post-election, the VIX index has retreated, indicating that fear and volatility have declined.

To understand how the markets perform during the election years, read the Elections 2024: How stocks perform in election years.

Now that we have understood the market trends during election years, we must know how to use them to our benefit and navigate a market that is exhibiting high volatility. Let us start by understanding how to evaluate the portfolio.

Evaluating Your Portfolio’s Resilience

Assessing a solid investment portfolio hinge on understanding the key performance metrics.

Relative Performance: This compares your returns to relevant market benchmarks. A portfolio up 20% against a 15% market increase shows good performance, but risk variations must be considered. Read 5 key ratios to assess financial health of a company to understand investments’ profitability, growth potential, and financial health.

Understanding Risk: While focusing on returns is important, evaluating risk is equally crucial to building a resilient portfolio. This point further discusses the tools you can use to manage your portfolio risk.

Read What Is an investment risk pyramid - a detailed guide to understand your risk profile. Afterwards, you can head Portfolio to view conservative, moderate & aggressive portfolio strategies.

Managing your rewards and risks go hand in hand. We will now understand how to safeguard the portfolio during uncertain events and make mindful investing decisions.

Strategic Approaches to Make Your Portfolio Election-Proof

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Diversification

Diversification, in a nutshell, means avoiding putting all your eggs in one basket. It entails spreading and allocating your capital across various instruments and asset classes that are not correlated to each other. This minimizes risk and reduces potential portfolio drawdown when the markets are turbulent.

This can be achieved in multiple ways – you can diversify by choosing different sectors, allocating capital to other asset classes, or spreading your investments in other geographies.

To learn more about diversification, click here

Sectoral Diversification

Sectoral or Industry diversification allocates capital in different industries (typically those with inverse correlation) to benefit from high-growth industries while keeping the portfolio stable.

Our objective is to make the portfolio uncertainty-proof, so investing in sectors typically resilient to adverse market events is key. In other words, they are known as Defensive sectors, which include healthcare, utilities, and consumer staples.

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Healthcare: Demand for healthcare services remains stable as individuals prioritize their health, regardless of political change. Companies in this sector include UnitedHealth Group, CVS Health, Eli Lilly and Company.
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Ultilities: Typically characterized by consistent cash flow and essential services, utility companies perform reliably even in turbulent markets. Companies in this sector include Dominion Energy and NextEra Energy.
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Consumer Staples: Products in this sector are necessary for daily life and tend to show less fluctuation in demand, providing a stable revenue stream. Companies in this sector include Proctor & Gamble, PepsiCo, Coca-Cola, Costco.

Asset Class diversification

Various investment asset classes are presented in commodities, currencies, equities, and bonds. Investing in different asset classes can lower risk and safeguard the portfolio against adverse fluctuations in any given asset class.

The objective here should be to include assets that are inversely correlated.

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One of them is Bonds, which fits this criterion, because they are relatively more stable. Integrating bonds into your portfolio can provide a cushion against equity volatility.

Our teams have created strategies using treasury bonds, which you can use as a part of your portfolio; view it here

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You might have heard that Gold is considered as a safe-haven asset. Well, it is true that historically, gold is a reliable hedge against inflation and currency fluctuations. Its value often increases during market instability, making it a prudent choice during volatile times.
 

Gold Price rally this year

Source: tradingeconomics

2024 was a year with geopolitical tensions, uncertainties like inflation, interest rates, global events, technology, and the political climate and now we have the US Presidential Elections in focus, which is one of the reasons why Gold has rallied about 30% this year

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Focus on Long term Goals

Markets, in particular equities, are usually driven by both short-term fluctuations sparked by changing market sentiment as well as long-term fundamentals. Short-term price movements are temporary and short-lived. However, it is essential to analyze long-term fundamentals when investing in stocks.

Instead of making hasty decisions, concentrate on your investment objectives, risk tolerance, and investment horizons.

In addition, maintain adaptability by ensuring regular rebalancing of your portfolio.

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Implementing a Risk Management Strategy

Having a risk management strategy is always essential as markets can become volatile. It allows you to capitalize on opportunities and shield your portfolio from huge losses.

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An emergency fund acts as a financial safety net during uncertain times, providing liquidity to cover personal or unexpected expenses without liquidating long-term investments.
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Stop-loss orders allow you to automatically sell securities if their price drops to a certain level, capping your losses.
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The Century Trader App offers trading tools that not only help you trade or invest with ease but also keep you informed by providing alerts and real-time news, helping you manage your portfolio.

Long story short, you should read this article to understand all about the Century Trader App to help you manage your risk

The Bottom Line

It is essential to be prepared for uncertainty rather than panic. Now that you know the actions you should be taking, identify opportunities to turn such events into opportunities by being aware and well-read.

Century Financial Consultancy LLC (CFC) is duly licensed and regulated by the Securities and Commodities Authority of UAE (SCA) under license numbers 2020000028 and 2020000081, to practice the activities of Trading broker in the international markets, Trading broker of the Over-The-Counter (OTC) derivatives and currencies in the spot market, Introduction, Financial Consultation and Financial Analysis, and Promotion. CFC is a Limited Liability Company incorporated under the laws of the UAE and registered with the Department of Economic Development of Dubai (registration number 768189).

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