Strategies for Securing Your Deposits Against Financial Turmoil
In times of economic uncertainty, investing according to a well-defined plan is crucial. This means spreading investments across various asset classes, industries, and geographic regions, a strategy known as diversification.
A diversified portfolio can help protect assets by reducing risk from market volatility. This approach ensures that the portfolio is not overly dependent on any one investment or market segment. By balancing risk and return, it aligns with personal goals, risk tolerance, and investment horizon.
Key strategies for creating a diversified portfolio include asset allocation, adjusting equity exposure by age or risk tolerance, diversifying within asset classes, including alternative investments, regular contributions and rebalancing, and seeking professional advice.
Asset allocation involves spreading money across stocks, bonds, real estate investment trusts (REITs), cash equivalents, and sometimes alternative investments like private equity or private credit. For instance, a moderately aggressive portfolio might consist of roughly 35% U.S. large-cap stocks, 15% U.S. small/mid-cap stocks, 20% international stocks, 20% bonds, 5% REITs, and 5% cash or money market funds.
Adjusting equity exposure by age or risk tolerance means younger investors might have a higher percentage in stocks for growth, gradually shifting towards more bonds and cash as retirement nears for stability.
Diversifying within asset classes involves investing across various industries and geographic markets, including emerging and developed international markets, to reduce sector- or location-specific risk.
Including alternative investments like private equity, non-traded REITs, or private credit can lower correlations with traditional stocks and bonds, potentially reducing portfolio volatility and improving risk-adjusted returns.
Regular contributions and rebalancing help manage risk and maintain the portfolio's target allocations aligned with goals and market changes.
Consulting a financial advisor can help tailor diversification strategies to specific financial plans, risk tolerances, and long-term objectives.
Most global indices, such as the MSCI World, have around 70% of US companies. Investors should not shy away from these indices, as their high market capitalization is not inherently problematic. Those who wish to achieve a more balanced country weighting can consider alternative indices or supplementary investments in other regions.
Bonds, time deposits, or fixed deposits offer security through their fixed interest rates but provide less return compared to stocks. Proven are broadly diversified Exchange-Traded Funds (ETFs) on established indices such as the MSCI World, STOXX Europe 600, or MSCI Asia.
Olaf Stotz suggests that two ETFs are enough in a portfolio: a money market or bond ETF for security and a global stocks ETF for returns. Stocks are subject to price fluctuations, making them less secure, but they promise higher returns in the best-case scenario.
Consumers who want to protect themselves should check if the equity share matches their personal risk profile and shift a portion of the portfolio to safer investments if necessary. Continuing savings plans can help balance market fluctuations in the long run.
Having an emergency fund outside the portfolio is important, so unexpected expenses do not force one to sell securities at an unfavorable time. A crisis-resistant portfolio is characterized by broad diversification across different asset classes, regions, sectors, and individual securities.
A crisis also creates opportunities, as shares become significantly cheaper when prices fall. Such an exchange-traded index fund usually contains all the stocks listed in the underlying index.
However, it's essential to be cautious about certain investments. Thomas Krüger of Stiftung Warentest views very expensive products like funds with very high ongoing costs, products with opaque structures like many closed funds or complex certificates, and highly speculative products like funds on individual emerging markets or even cryptocurrencies critically.
Individual stocks should serve as a complement, and only if one understands the company. Panic selling when prices are falling is rarely a good idea, as it realizes paper losses and misses out on potential future recovery. Staying calm, enduring fluctuations, and never losing sight of the long-term investment horizon is crucial.
In conclusion, a diversified portfolio is a powerful tool for protecting assets during economic uncertainty. By spreading investments across various asset classes, industries, and geographic regions, investors can reduce risk, enhance potential for stable growth, and navigate market volatility with greater confidence.
- To create a diversified portfolio that aligns with personal financial goals, one should consider investing in various asset classes, such as stocks, bonds, and real estate investment trusts (REITs), and may even include alternative investments like private equity or private credit.
- An essential component of a well-diversified portfolio is the strategy of asset allocation, which involves spreading money wisely across different asset classes, striking a balance between risk and return, and adjusting the allocation based on age, risk tolerance, or investment horizon.
