Protecting your portfolio during turbulent times

One way or another, 2020 looks set to be an interesting year.  The UK should have separated from the EU unless the PM changes his mind or a general election gives us a new government.  The U.S. is due another Presidential election and several other countries around the world will also be having general elections, including Iran.  Interesting years may be good for journalists but they can be challenging for investors, who need to focus on protecting their portfolio during turbulent times.  Here are some tips.

Remember that the basic rules of investing stay much the same

There is really only one golden rule of investing, which is to take every investment decision in a mindful manner.  In other words, be clear about why you are doing what you are doing.  Even if you have to react quickly to a changing situation, you need to do so calmly, rather than in a panic.  That may be easier said than done, but, frankly, that ability is often what differentiates successful investors from everybody else.

In short, when times get turbulent, panic can easily do more damage to a portfolio than market conditions.

Avoid the temptation to rush to the “safety” of cash and near-cash

This is really an extension of the previous point but it’s important enough to deserve a mention in its own right.

When times are turbulent, there may be a case for increasing your holding of cash and near-cash assets such as bonds.  The reason for this has nothing to do with investment per se.  It’s just a pragmatic recognition of the fact that turbulent times could lead to there being sudden, unexpected demands on your cash reserves.  Therefore, holding extra cash and near-cash could be viewed as insurance against having either to borrow (and pay finance costs) or to be forced to sell assets you would have preferred to keep, such as equities you were holding for the long term.

At the same time, however, there is a risk in being over-exposed in any area of your portfolio and that includes cash and near-cash – even if interest rates look set to be trending upwards.  The simple fact is that interest rates generally reflect inflationary pressures.  In other words, increasing interest rates are a sign that the Bank of England feels that it needs to combat high inflation.  It will, however, be well aware that, while high-interest rates are great news for savers, many people in the UK have some form of debt, even if it is “just” mortgage debt (which typically attracts lower interest rates, but also tends to involve fairly substantial loan amounts, especially in the early stages).  It is therefore very likely that both the BoE and the government will want to do everything they can to relieve the inflationary pressures and bring interest rates back down again.

In other words, even if you see interest rates heading sharply upwards, be aware that they can very definitely come straight back down again.

Use volatility to look for bargain buys

The “buy low sell high” mentality is more commonly associated with short-term trading than long-term investing but everybody loves a bargain and turbulent times can be a perfect opportunity to go hunting for them.  Just as a rising tide floats all boats, so an ebbing tide can sink a company’s share value even if their financials and business model are both absolutely solid.  In other words, for the most part there is a lot of truth in the old saying “if something looks too good to be true, the chances are that it probably is,” there are, however, always some exceptions to every rule and market downturns are exactly the time astute investors go out of their way to look for them.