Investing can be an emotional rollercoaster, especially when markets experience volatility. Whether it’s inflation or unpredictable market swings, staying invested in a well-structured portfolio is crucial for long-term wealth growth. However, during times of market uncertainty, it’s natural to question whether adjustments are needed to ensure the portfolio remains resilient.
To enhance the strength of your portfolio, it’s important to regularly assess its structure and resilience. Below are four essential questions you should consider to help protect your investments and make sure you’re on the right path.
1. Where Do You Stand Today?
The first step to improving your portfolio’s resilience is understanding where you currently stand. Take the time to evaluate your asset allocation. Are you heavily invested in certain sectors, countries, or asset classes? Do you have concentrated individual holdings or high exposure to particular currencies?
High concentration in certain areas can expose you to specific risks, such as volatility, liquidity concerns, or even regulatory changes. It’s crucial to assess whether your portfolio is taking on more risk than you’re comfortable with in any one area. This evaluation helps determine whether any adjustments are necessary to better align with your risk tolerance.
2. Is Your Portfolio Diversified?
Diversification is a key strategy to reduce risk. Different asset classes, like equities and bonds, behave differently in various economic conditions. Equities, for instance, offer growth potential but tend to be riskier, while bonds typically provide more income but with less growth potential.
Diversifying across asset classes is an effective way to protect your portfolio from large losses during market downturns. Since 2000, there have been only a few instances where both global equities and bonds declined in the same year, which highlights the importance of diversification.
In addition to diversifying between asset classes, it’s also important to diversify within them. This means spreading your investments across various geographical regions and economic sectors. A well-diversified portfolio has access to different sources of returns, which can provide a cushion during economic turbulence.
3. Should You Add Extra Fortification?
In periods of heightened market uncertainty, it may be wise to consider fortifying your portfolio with assets that have lower correlations to the broader market. Adding assets such as real estate, infrastructure, or gold-related equities can provide a buffer when traditional assets like stocks and bonds face volatility.
Another option is to focus on higher-quality assets. High-quality equities are typically those with strong financial health, including stable balance sheets, consistent earnings growth, and low debt. These stocks are often more resilient in uncertain times and may fare better than their peers. Similarly, high-quality bonds, like government or investment-grade bonds, are more dependable and less likely to default, offering greater security in times of market stress.
If you’re seeking even more protection, certain structured products can be used to reduce downside risk. However, these come with trade-offs, such as a reduction in potential upside gains, so be sure to evaluate their costs before proceeding.
4. Does Your Asset Allocation Still Meet Your Goals?
Your asset allocation is the foundation of your portfolio’s performance. Over time, as markets fluctuate, the relative weight of your assets may shift, causing your portfolio to drift from your original goals. It’s important to regularly review your asset allocation to ensure it still aligns with your objectives and risk tolerance.
If the balance of your portfolio has changed, you may need to make adjustments to get back on track. The goal is to keep your portfolio aligned with your long-term financial objectives, even as market conditions evolve.
Conclusion
Building a resilient portfolio is not a one-time task—it requires ongoing evaluation and adjustments to stay on course. By asking the right questions about diversification, asset allocation, and fortification, you can ensure your portfolio remains strong enough to weather market volatility and help you meet your financial goals over the long term.
