Financial markets are displaying extreme angst currently.
2022 witnessed the worst start to an equity market since 1962. Seemingly safe instruments like bonds are also down between 10 percent to 20 percent this year.
We have countries such as Sri Lanka and companies such as Evergrande, Revlon defaulting, and cryptocurrencies such as Terra and Luna being dethroned.
I have written a few articles already in the past few weeks with my thoughts on markets and the global economy.
I thought it might be helpful to also put down a series of pointers to help readers plot a path through the current malaise.
1. Diversify by time horizon and liquidity needs
For example, if you can mentally put some money aside for 2 years and don’t actually need access to it for that time, then that will open up a wider set of opportunities to invest in.
If you want the ability to access your investments daily, then that will narrow your options.
For example, you could split up your investments into 3 buckets,
a. Short-term (up to 2 years) liquid instruments which is mainly cash and bonds,
b. Medium-term (up to 4 years) liquid instruments which would be blue chip global equities and
c. Longer-term liquid and illiquid investments, quality distressed equities, prime real estate and private market opportunities. This approach should help you diversify appropriately.
2. Keep things simple
This is the wrong time, in my opinion, to do anything complex unless you truly understand the risk reward trade off being offered.
3. Avoid leverage
This is a very difficult investing environment and leverage when it goes wrong forces you into making irrational decisions. Plus no one likes a margin call.
4. Don’t buy assets which are expensive compared to their long-term average or their peers
This financial market is going to punish any investment which is overvalued if there is even the slightest inclination that the premium is not justified.
5. Do not average your cost down just because an investment has fallen a lot in price
If the current value is still much higher than its true intrinsic value, it could fall a lot more still.
6. Try to avoid speculating to recover losses
This will only lead to more losses. Look for assets which look cheap relative to their outlook 2-3 years from now.
This is no mean feat to do but encourage your financial providers to focus on finding these potential opportunities and not another quick trade.
7. Don’t be shy to ask for help
Multiple brains trying to help you work out solutions will always be better than trying to go it alone right now.
Financial markets will stay volatile until the path to lower inflation is clear. The added fear is that an economic recession is the only way inflation will be brought under control.
This catch-22 situation is keeping markets very nervous. And it could take some time for both of these fears (inflation, recession) to settle down.
Until the storm clouds clear, hopefully the above list helps limit the downside in your portfolio.
Arjun Mittal is the founder and chief investment officer at Abbey Road IG Multi Family Office, an independent advisory firm. He has worked in the financial industry for 23 years across senior roles in London and Dubai.
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