The 7 key components of a resilient portfolio
Markets are inherently uncertain, and downturns are inevitable. A resilient portfolio should be well-positioned to weather market storms while still achieving your long-term investment objectives.
Successful investing is about managing risk, not avoiding it.
– Benjamin Graham
Create your asset allocation and maintain discipline during periods of market volatility
The asset allocation of your portfolio should be tailored to your risk tolerance, return objectives, and time horizon. Different asset classes offer varying returns and react differently to market conditions. Spreading your investments across various asset classes can help smooth out volatility. A resilient investment portfolio is often built with a long-term perspective. Trying to time the market or reacting impulsively to short-term fluctuations can lead to poor decision-making and increased risk.
Keep 2 to 3 years of expenses in liquidities: cash is king
One of the most valuable assets to have in your investment portfolio during a stock market crash is cash. Having enough liquidities to support your lifestyle means you won’t need to sell shares at lower prices during a decline. Cash provides peace of mind and the opportunity to buy good companies at bargain prices.
Moderate your borrowing: debt is death
Your bank can lend you money against the value of your portfolio, with your liquid securities pledged as collateral. Interest rates vary depending on the amount borrowed and the loan duration, but they tend to be lower than unsecured lending options such as overdrafts.
The advantage of a loan against assets is that you can receive additional cash without having to sell securities, allowing you to continue benefiting from their price increases. However, if you borrow too much and your portfolio’s value declines, the bank can ask you to provide more collateral. If you fail to meet this obligation, the bank is entitled to sell the pledged securities.
Buy quality investments that you understand
Understand the various factors driving your investments and invest in securities you feel most comfortable with. Conduct thorough research, understand the fundamentals of each investment, and consider factors such as performance history, management quality, fair value, and liquidity.
Diversify
By investing across a variety of asset classes, sectors, currencies, and geographies, you can reduce the overall risk exposure of your portfolio and mitigate the impact of any single investment’s poor performance. Avoid any type of concentration. Choose suitable investments within each asset class. For stocks, this might involve using ETFs, mutual funds, and individual companies. For bonds, consider credit quality, duration, country, and sector.
Keep investment costs low and minimize taxes
Maximize your after-tax return by using strategies to minimize taxes such as holding your investments in tax-advantaged accounts. Minimize fees associated with advisory or portfolio management services, brokerage, or fund management.
In investing, you get what you don’t pay for. Costs matter.
– John C. Bogle
Adapt your portfolio regularly: markets are constantly evolving
Financial objectives, risk tolerance, and market conditions can change over time. You should review your portfolio regularly and make any necessary adjustments. This may include changing exposure to currencies, regions, and sectors, investing in new asset classes, or rebalancing your portfolio to ensure it remains aligned with your investment profile.
