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Preparing your investment portfolio for a second wave

Posted by Adrian Lowcock in Press releases category on 07 Jul 20

When stock markets are rising it is all too easy to become complacent and assume the global economy is also rebounding strongly, and the bear market is history. However, there are nearly always setbacks on the path to recovery.

With the prospects of a second wave of infections, further lockdowns and huge job losses all facing the global economy, it makes more sense than ever to be prepared when it comes to your investments. So how can we position portfolios for the uncertainties that remain, especially with a possible second wave of the COVID-19 pandemic?  

The rally hits the buffers

Volatility has returned to stock markets as fears of a second wave of infections dampen investor sentiment. While the UK and Europe continue to report declines in new infections, the US has seen record numbers in some states. 

Widespread central bank stimulus and government support have driven the stock market rally over the last few months, but the crisis might be not be over. Whilst expectations for a V-shaped economic recovery remains the most popular, it is also the most optimistic.  

There are concerns that the gradual easing of restrictions may have to be reversed. A second lockdown would have more serious economic consequences and impact the profitability of companies, even though policy-makers appear committed to delivering whatever stimulus is needed to get us through this crisis.  

Consumer confidence is recovering, but fear of the virus returning could have a significant impact on sentiment and impact markets. All the while companies are making redundancies. 

Faced with this reality, what can investors do? 

Three tips to protect your portfolio

Diversify - Not all asset classes go up at the same time so it can help to have a well-diversified portfolio. If and when equity markets fall you then have some assets which are performing better than others. How much diversification you have is up to you but as a rule of thumb, it’s good for a portfolio to have somewhere between 10 to 20 funds to give exposure to every major asset class and differing investment styles.

Focus on the long term - Following the crowd is not necessarily a good idea when it comes to investing. By the time you sell, it may be too late and you may not get back in before markets change direction again. This year has served as a reminder that turning points can be dramatic. Rather than trying to time the market, consider drip feeding money in regularly.

Keep calm - Sell-offs are often indiscriminate and driven by fear. They can present buying opportunities for patient investors. By investing in a fund you access professional managers who are experienced in sorting the wheat from the chaff and may use the dips to add to their favourite companies.

Three investments that could help protect your portfolio

Absolute Return funds – These aim to deliver a positive return regardless of market conditions but not all have achieved this. Some make extensive use of derivatives to benefit when markets fall.

The Trojan fund aims to preserve capital, though this is not guaranteed. It has a flexible approach and invests in a wide range of assets including government bonds, corporate bonds, shares, private equity, precious metals and cash.

Gold –Gold tends to do well when shares or bonds are falling, and vice versa. Although gold doesn’t produce an income it is seen as a safe haven. Given the finite supply, it is highly sought after by central banks and wealthy individuals as a store of value. While it is currently trading near a record high, the sheer scale of monetary stimulus globally suggests it could set a new high this time around.

BlackRock Gold & General invests worldwide in leading gold miners.   Managers Evy Hambro and Tom Holl have a disciplined approach, focus on valuation analysis, and look for companies with the best exposure to commodity prices within an acceptable level of risk. The fund has an emphasis on larger producers.

Bond funds – Bonds are the traditional diversifier from equities, albeit low interest rates have reduced their appeal somewhat. The fixed interest element of a bond can underpin total returns, though company defaults are still a risk. Government bonds have historically performed well in times of market stress, helped by government quantitative easing programmes.

M&G Global Macro Bond fund has a ‘go-anywhere’ approach across global fixed-income markets and currently offers a yield of around 2.5%. Manager Jim Leaviss positions the fund aggressively to where he sees the best opportunities.