During the 1980s, investors noticed that the Japanese stock market had been performing well for decades due to its rapid economic development.
Countries like Hong Kong, Singapore, Korea, and Taiwan have successfully adopted similar industrialization strategies and have been referred to as emerging markets.
Investment portfolios in the United States and Europe were exposed to the difficulties of their domestic manufacturing industries as globalization accelerated, triggering a shift in asset allocation from developed markets to emerging market equities.
The developing world has seen rapid economic progress over the past few decades, and the term emerging market no longer captures the full picture. Investors need to take a more nuanced view.
Geographic diversification has proven effective in generating returns while mitigating risk in the past.
However, in 2020, when markets crashed due to recession fears caused by the COVID-19 pandemic, global equity diversification disappeared when it was needed most.
As globalization progressed, economies became complex, increasing the correlation between global stock markets.
Diversifying portfolios between asset classes should protect them from vulnerability to extreme price movements. While economically correlated assets simultaneously suffer during recessions, less sensitive asset classes reduce portfolio risk.
Investors can generally use these assets to protect their portfolios against difficult times. Domestic government bonds can protect investors against deflation risks.
Holding cash dampens portfolio volatility and allows investors to buy at lower prices during stock market crashes. Gold generally performs well when the threat of inflation persists for a longer period or during political uncertainties.
Investors can deduce from Schedule 1 that no asset class consistently outperforms others in the short term, and the 10-year CAGR interpreting investing over a longer horizon will compound wealth.
We ran back tests and found that even a vanilla hybrid fund (60% equity and 40% debt) could maximize return and mitigate volatility for the risk taken. The reasons for this are that asset classes, with few exceptions, tend to be inconsistently influenced by macroeconomic events, resulting in better risk-return trade-offs.
The appropriate proportion of capital allocated to assets is crucial to building an optimal portfolio. Otherwise, investors are exposed to undue risks; for example, if an investor were to invest 100% of the capital in the index, he would be exposed to excessive volatility.
However, tactical asset allocation will integrate financial market expectations with the level of risk and constraints desired by investors, focusing on the long term as exposures are targeted based on the quantifiable systemic risk of each asset class. assets and generating maximum returns for the risk an investor can hold. .
Technological advances are shaking up the economy and the markets, creating a finer analysis of a diversified portfolio of alternative assets that can generate returns comparable to those of traditional risky investments: equities and corporate bonds.
Diversification across asset classes can increase the certainty of generating higher returns over the long term while mitigating risk to the desired level.
Millennials are tech savvy when it comes to investing and having access to information from a wide range of sources. However, we suggest refraining from investing directly in stocks unless they have a thorough understanding of the business.
Otherwise, consult a financial advisor or the simplest and most effective strategy to follow is the systematic plan of investing in two or three selective mutual funds.
Millennials often look at real estate emotionally and plan to buy homes earlier in life.
However, we suggest prioritizing and allocating more to equities in the early stages and possibly increasing the allocation to real estate, debt and gold, as equities will offer higher returns per relative to other long-term asset classes.
(The author is founder and fund manager, Right Horizons)
