The current investment backdrop is still one characterised by economic uncertainty, short business cycles and a polarization of asset returns that is reducing much of active portfolio management to a call on risk.
However, I am entering 2013 in an optimistic mood! The OECD’s lead indicator for global growth is positive, and housing and labour market data from the US continues to come in strong.
Recently, the US Senate, faced with the potentially catastrophic “fiscal cliff,” have finally swung into action and passed legislation designed to avert disaster, but only to a certain extent. Following the new global approach to solving problems, what the US Senate really did was kick the can down the road. One has to wonder whether this has been a global economic tactic for many countries over the past couple of years, especially in the Eurozone.
We have seen a year-end rally and global markets currently look in good shape there is still the possibility of volatility to follow if the root of the problems is not addressed.
For private investors this is short-term bad news but the good news is that there are many ways to protect your wealth. By following a few universal investment rules, if the markets do fall 20% in 2013, you are protected on the down side.
De-risk your current portfolio
We all like growth to accompany our investments but there are many other factors to take into consideration. One of the more important factors is the underlying asset and what risk is associated with it as well as who is managing it for you. It is best to be placed in funds that are more protected from falling markets in these times.
Market volatility is nothing new, yet time and again investors fail to keep crisis events in perspective. As unsettling as dips can be, long-term history has shown that while stock markets often react strongly to major events, they have often resumed their upward trend in a very short space of time.
There are certain principles to stand by during a crisis period that will help you make investment decisions; diversification is one of them. Make sure your portfolio is diversified across asset classes to reduce risk and smooth returns.
It can be difficult to invest with confidence while markets are volatile, but don’t let short-term market movements alter investment decisions. Over the long term, discipline breeds success. Keeping calm and adopting a consistent and disciplined investment approach can help ride out volatility and give the opportunity to buy quality assets at a more attractive price than they were trading at when markets were higher.
Don’t try to time markets
It is very difficult to predict when is the best time to enter or exit the market; those who try to time this usually miss the bounce. You’ve got to be in it to win it!
Be wary of anyone who tries to tell you they can see into the future: nobody has a crystal ball. Do take expert advice, though. In times of crisis, no matter how much you think you may know, rely on a professional manager who devotes considerable time sifting through market information and understanding market influence.
The recovery phase does appear to be on the horizon, but the US and the Eurozone still face many obstacles on the road to recovery and this will have an impact for those invested in financial markets. So make 2013 a time to review any existing portfolios you may have, whether large or small, with a view of putting in place a thoughtful investment strategy in line with what’s going on in the world today.
The writer is senior financial consultant at Acuma-Independent Wealth Advice, Dubai. Opinion expressed here is his own and do not necessarily reflect that of Gulf News.