December 3, 2022

Investing Strategies for Market Turmoil


The last decade or so has seen what can only be described as unprecedented growth across almost all asset classes. According to a study done by investment bank Goldman Sachs, the S&P 500 (a collection of the top 500 publicly companies in the US) returned an average of 13.6% between 2010 and 2020. Link

Or: $10,000 invested in the index in 2010 would have returned just under $36,000 in 2020. With the inexorable rise of cryptocurrencies, NFTs, startup performance and a whole host of other asset classes performing equally well, it’s been a great decade for investors. It can therefore be easy to a) feel like you missed out, and b) imagine that this sort of performance will continue forever. While we hate to be naysayers, it’s unlikely to continue in perpetuity and retail investors like you and I should be wary of diverging from a long term plan that takes into account the relative risk of different asset classes and how they fit into a long term portfolio.

So how do you do this? Well, the no.1 thing to do is think about your risk tolerance. No, this doesn’t have much to do with your personality, it’s more about how much money you have the capacity to lose, how long you are investing for, how worried you’d be in a severe market decline, how varied you want your portfolio to be, and more.

Risk Tolerance

If you’re not sure how to do this, a good place to start is what sort of time horizon you’re investing over — 30 or 40 years means you have the time to weather any short term dips and can hold slightly riskier assets with larger upside. Regardless of outcome, a significant proportion of your portfolio will likely end up in equities: without these your assets are unlikely to keep pace with inflation, let alone beat it.The broad landscape and risk profile of common asset classes is shown below:

The Asset-Risk Pyramid

One famous strategy involves subtracting your age from 100 and holding that in equities. So a 30yo investor would allocate 70% to equities, and a 60yo would allocate 40%. This is a good place to start, while probably erring on the side of caution.

Diversification & Rebalancing

When choosing the specific assets, be sure not just to invest across the asset classes in the pyramid, but also within each category (ie different types of stock) and across geographies (to mitigate exchange rate risk). We talk about common practice dictating no more than 5–10% of a total portfolio into alternatives (that’s all alternatives, not just crypto!), and find this to be sound advice. Finally, don’t forget that as value fluctuate, so will % weights. If your equities stay flat and your alternatives double, you’re no longer following your target weight. By choosing this time to rebalance towards target, you’re effectively buying low and selling high. Sounds simple, right! Luckily we've introduced a portfolio rebalancing tool to the Strabo dashboard to make it much simpler to stick to a target allocation.

But what about Crypto, Sneakers and my roommate's new Startup?

All fine, and in fact encouraged! But these, and more, fall well and truly in the alternatives bucket, and should remain consistent with your target allocation. It is worth noting that the impressive performance of many of these assets will mean that they might now make up more of your portfolio than you may have intended. If this is a source of discomfort we’d encourage a rebalance, or perhaps simply directing future savings elsewhere until balance is restored could mitigate a change in risk profile that might result. When in doubt, seek advice.

Wrapping Up

It’s important to note that the specifics of your plan aren’t necessarily the important part, it’s more about the discipline of sticking to one and not getting carried away. We always direct people towards the famous Fidelity study which found that their best performing clients were those that forgot their passwords and didn’t log in to tinker! There’s a lesson in there somewhere.

‍As always, these posts should be taken as general guidance and do not represent financial advice. Please do reach out to one of the team with any thoughts or questions — we are finance geeks at heart and would love to chat all things investing with you!

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