IT is natural for investors to reshuffle their investment portfolios in the current challenging times of rising inflation and economic uncertainties as they want to ensure that their money is safe from market volatility.
Lombard Odier, in its recent survey, revealed that Asia-Pacific high net worth (Apac HNW) investors are opting for conservative approaches and repositioning their portfolios.
They are diverting from traditional asset classes such as equities and bonds towards cash and gold and even private equity assets.
This has been happening over the past two years.
Gold is often seen as a natural hedge against inflation. But beyond gold, there are other safer alternatives including private assets that seem to come with low liquidity concerns.
Lombard, in its survey, said nearly half of the Apac HNW respondents are worried about market volatility and its negative impact on performance.
More than two-thirds have acted decisively to realign portfolios.
Amid uncertain and gloomy times, the realigning of portfolios is not just for the wealthy but anyone investing to accumulate wealth.
The last thing you want is to see your fortunes wiped out if you have not relooked your investments or are investing only in one asset type.
Diversification is about putting your money in several asset classes.
By doing so, you are spreading your risks in the hope of better returns.
The realigning or reviewing of portfolios is a necessity.
This can be done quarterly, half yearly or on a yearly basis. However, it is more pressing during the current times.
The goal of diversification is not necessarily to boost performance as it won’t ensure gains or guarantee against losses, according to a report.
But it has the potential to improve returns for the level of risk an investor chose to target.
“Portfolio diversification is needed all the time at every stage in life. Whereas rebalancing is needed every now and then and it depends on how comfortable the investor is.
“If the portfolio is highly volatile with risky assets, then the need to rebalance may be often. In comparison, it would be less for fundamentally safe assets,’’ said IPPFA Sdn Bhd licensed financial planner Kimberly Law.
Diversification helps to make sure that a portfolio doesn’t get wiped out by a single asset class and one should always stay diversified especially when investing, according to her. “But don’t overdo it as over-diversification may not be advisable. So is having too many baskets of assets.
“This is so if one asset class does very well, the returns may be insignificant in terms of returns. Maintaining the right balance is key,’’ she said.
When diversifying, an investor needs to consider several variables such as liquidity needs, financial goals, time horizon, risk appetite, cash flow management including income and expenditure.
There are also many asset classes to build a portfolio in the quest to accumulate wealth.
This includes equity-based such as stocks/shares, mutual/unit trust funds; fixed income instruments such as bond funds; cash/value storage such as fixed deposits and gold.
It can also include property/real estate investment trusts; alternative investments such as collectibles, peer-to-peer lending, equity crowdfunding and cryptocurrencies.
When building a portfolio, an investor should look at his or her liquidity needs.
For example, if the person plans to use money in a year, then avoid investing in non-liquid assets such as property/real estate, according to Law.
“There is also a price for liquidity as high liquidity and safe assets may not give you the returns you want. If you opt for safe and high risk/returns, then you have to give up on liquidity.
“You can’t possibly have everything so you need a balance of different asset classes. But if an investment has very high liquidity, appears safe and offers high returns, then it is most probably a scam,’’ she said.
Law said the general rule of the thumb is to diversify into five asset classes.
To get started, an investor can go for two to three different asset classes and increasing the number to five.
“You can start with equity-based and fixedincome and then add other asset classes. It is highly not recommended to start with alternative investments,’’ she said.
She also pointed out that confusion often arises when someone invests using different instruments such as stocks and equity-based unit trusts.
That is not a diversification strategy since the underlying asset is the same.
Investors should diversify their portfolios.
Look for asset classes that are not too adverse to volatility and companies that can weather periods of economic uncertainties.