Nobody can predict the future. And even with the availability of hundreds of data, economists and financial analysts can only but speculate on where the economy will go in the coming years.
It doesn’t matter if it’s a pandemic, a political trade war, or an economic global crisis – financial markets will always be unpredictable, as unpredictable as human behavior. And it is why all investments have risks.
Incidentally, even if you don’t invest and just keep all your money in the bank, inflation will just slowly diminish your money’s value. Or worse, the bank itself can close down and you’re left with only what’s covered by the PDIC.
All these may sound pessimistic, but we need to understand this reality so we can invest and manage our money better.
So, given that markets are always uncertain, what are the best investment strategies to follow? Here are five tips.
1. Diversify
I was speechless when someone told me that all his money is in cryptocurrencies. That’s probably the riskiest thing you can do today. However, putting all your money in a bank savings account is not a smart thing to do either.
Creating a diversified portfolio, where your money is invested in different types of assets (stocks, bonds, currencies, etc.) and different markets (local, Asian, US, Europe, global, etc.), won’t protect you entirely from market falls in uncertain times but it can give you a more consistent return over time.
2. Align your investments with your goals
Those who invest without goals are more likely to worry and panic when there’s market volatility. On the other hand, those with clearly defined financial goals are more likely to find a sound strategy to ride through market uncertainties.
For instance, the share prices of local companies fell in March 2020. Jollibee went down from a peak of around P210 in January to just P98 in March. Imagine losing half the value of your investment in just 2 months.
But if your stock investments are for your retirement fund, then there’s no need to panic. You won’t require the money until after several years, so you can just sit tight and ride through the volatility, or perhaps buy more shares of Jollibee if you have extra money.
Why? Because the fall of the share prices was caused by the closing of the economy due to COVID-19 and not because Jollibee is failing as a business. This is short-term and when everything goes back to normal, Jollibee will resume its business growth.
It’s December 2021 and circumstances aren’t as bad as it was in 2020, and Jollibee shares are now back up and trading at P220.
3. Rebalance your portfolio if necessary
In 2020, cryptocurrencies went on a bull run and their weight in my portfolio went from 5% to as much as 25%. I took the 20% profit and invested it in the local stock market.
Rebalancing means maintaining your preferred weight of each asset in your portfolio. Because it is highly speculative, I prefer having only 5% to 10% of my portfolio in crypto assets.
Having a preferred allocation helps in making investment decisions when one asset makes significant gains or experience major losses. However, rebalancing requires a level of investment knowledge and experience and should be done selectively and only when necessary.
4. Continue investing
Never stop investing just because markets are volatile. You can always choose to invest a smaller amount or put your money in low-risk or less volatile assets such as money market funds and government securities.
Cost averaging is an investment strategy that does well during uncertainties and volatilities because it removes the investor’s tendency to time the market. It helps the investor to avoid overthinking.
So, if you’re already doing this, then just follow your regular investment schedule. If not, then perhaps it’s time to learn how to do cost averaging.
5. Maintain a healthy amount of liquidity
It’s necessary to have a cash buffer so that you are not dependent on investment performance in the short term. Having an emergency fund is essential, as well as having at least 20% of your portfolio in low-risk, near-cash investments.
A quick test is to check if you can cover at least three years’ worth of necessary expenses with all the cash plus the current value of low-risk investments that you have now.
Final Thoughts
Markets are always uncertain, which makes these tips applicable all the time.
Nevertheless, you’ll appreciate more their benefits during particularly volatile markets similar to what we’ve been experiencing lately because of COVID-19.
Lastly, remember that personal finance will always be personal.
The best financial advice will always come from someone who specifically knows your financial resources, life situation, and investment goals. So, talk to a financial planner if you need expert guidance on how to manage your investment portfolio.
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