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Armour Your Portfolio Against Volatility with These Investments

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Now, we don’t want to be doom-mongers but the fact of the matter is that while over the long term financial markets have always continued to grow and gain in value, delivering investors with solid returns, they are also cyclical. History has demonstrated that boom periods are all followed by corrections and crashes. The good news is, those corrections and crashes in the markets are always followed by new boom periods that almost always hit new heights as the world’s economy continues to grow.

After an almost uninterrupted bull run for stock markets since the financial crisis a decade ago, analysts believe we are now approaching a riskier spell. 2018 has seen higher levels of market volatility than has been the case for some time and some believe a significant correction, or even a crash, could be on the horizon. A global survey of fund managers carried out by Bank of America Merrill Lynch earlier this month suggested that institutional investors are hedging their bets at the moment by reducing their exposure to equities to 18-month lows and increased cash holdings. They are also ramping up insurance to protect themselves against a major drop in share prices.

If you don’t plan to spend the value built up through investing online in an ISA or SIPP anytime soon, there is nothing to get too concerned about. Your portfolio will almost certainly recover when markets swing back up and there is every likelihood they will eventually exceed the records highs hit early this year. However, it still doesn’t hurt to adjust your portfolio to cushion the blow of a major correction or crash. The less the value of your investments are hurt by a fall the better the returns you will then be able to take advantage of when things turn around. So what are the best investments to armour online investments against a rocky patch for financial markets?

Value Preservation Multi-Asset Funds

Multi-Asset funds are a diverse portfolio invested in a variety of asset classes. Those that are weighted towards wealth preservation rather than returns will have significant allocations towards ‘safe haven’ asset classes such as property, gold, bonds and unlisted shares as well as globally diversified traditional listed equities. The will also often have an allocation to ‘shorting’ equities, which means derivatives that bet against the share price of certain companies, profiting if they fall.

Absolute Return Funds

This category of funds aims to generate a positive return over usually 3 to 5 years regardless of market conditions. These funds usually have allocations in equities as well as shorting other equities as well as gold and other assets.

Bond Funds

Bonds tend to be a better bet than equities when financial markets hit trouble. However, all bond funds are not the same beast as different categories of bonds are influenced by different factors and carry different risk profiles. Bonds with a shorter duration are less sensitive to interest rates increasing and with 3 or 4 Fed interest rate hikes currently forecast for this year, bond funds weighted towards shorter term maturity dates might be the safest bet. However, if markets were to crash, rather than simply suffer a correction, central banks could decide to lower rates again to stimulate the economy. In this scenario bonds with longer maturation dates would be expected to do better.

Luckily, there are some ‘strategic bond funds’ that can move between shorter and longer term duration holdings depending on market conditions.

Gold

The ultimate ‘safe haven’ investment, gold tends to perform well during market crashes. It doesn’t earn any income and returns are only based on the price of the commodity rising, which is why allocations to gold tend to be modest and viewed as a portfolio stabiliser. Investing in gold luckily doesn’t have to mean buying bullion and digging a hole in your garden to hide it, or even buying physical gold held in a vault somewhere. This is an option for those with a real bunker mentality but investing online in gold is most commonly done through gold-backed ETFs, which can be bought through online stock brokers.

Ditch the Riskier Shares in Your Portfolio

When markets are on a bull run, shares in high growth companies with plenty of promise tend to be the best performers on the market. However, high growth companies also often have high levels of debt and weaker balance sheets as the majority of revenue is directed back into further growth. When markets hit stormy waters, they favour companies with strong balance sheets, minimal debt and consistent earnings growth. It might be a good moment to cash in returns generated from riskier growth shares and reinvest in more boring, solid options that may not see 10% capital growth a year but won’t plummet if markets lose confidence.




Risk Warning:

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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