We are standing at the tail end of one of the longest bull markets in known history. While everything may seem rosy at the moment, there’s an old saying: “What goes up must come down.”
The American market, especially the tech sector, is at record highs, and on the local front, South African markets have delivered significant returns over the past few years.
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Now, I’m by no means a doomsday prophet, but I firmly believe in prudent investment strategies. Markets are cyclical, and while no one can predict when the next downturn will occur, preparing your portfolio to withstand crises is not just wise – it’s essential.
Here’s how you can build a crisis-proof investment portfolio to safeguard your wealth and position yourself for long-term success.
1. Diversify across asset classes
Diversification is the cornerstone of a crisis-proof portfolio. Spreading your investments across different asset classes reduces your exposure to risk when one sector or market falters.
How to diversify:
- Equities: Invest in a mix of local and international stocks to capture growth potential.
- Bonds: Include government and corporate bonds for stability and predictable income.
- Real Estate: Consider direct property investments or Reits (real estate investment trusts).
- Commodities: Gold and other precious metals serve as a hedge against inflation and market volatility.
Why it works:
Different asset classes react differently to market conditions. A downturn in one sector may be offset by growth in another, smoothing out overall performance.
2. Incorporate global exposure
Focusing solely on the South African market can leave you vulnerable to local economic and political risks. Adding global investments provides diversification and exposure to faster-growing economies.
How to add global exposure:
- Invest in international exchange-traded funds (ETFs) or mutual funds.
- Focus on high-growth sectors in emerging markets and stable industries in developed economies.
- Offshore investments can also hedge against currency fluctuations.
Why it works:
Global diversification spreads risk and gives you access to markets with different growth drivers.
3. Focus on quality investments
During market crises, high-quality investments tend to hold up better than speculative or poorly managed assets.
What to look for:
- Strong balance sheets: Companies with low debt and solid cash reserves.
- Consistent earnings: Businesses with a track record of steady profitability.
- Market leaders: Established companies with a proven competitive advantage.
Why it works:
Quality investments are more likely to survive market downturns and recover faster when conditions improve.
4. Maintain liquidity
A portion of your portfolio should remain liquid to allow you to capitalise on opportunities or meet unexpected cash needs during a crisis.
How to stay liquid:
- Keep funds in money market accounts or short-term bonds.
- Avoid overcommitting to illiquid investments like private equity or certain property assets.
Why it works:
Liquidity provides flexibility and ensures you won’t have to sell long-term investments at a loss.
5. Prepare for inflation
Even in bull markets, inflation can erode the value of your money. In crises, inflationary pressures can worsen, making it critical to have a hedge in place.
How to hedge against inflation:
- Commodities: Gold and oil are traditional inflation hedges.
- Inflation-linked bonds: South African government-issued bonds that adjust with inflation.
- Equities: Stocks tend to outperform inflation over the long term.
Why it works:
Investments that outpace inflation preserve your purchasing power and long-term wealth.
6. Rebalance regularly
As markets rise and fall, your portfolio allocation may drift from its original strategy, exposing you to unintended risks.
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How to rebalance:
- Assess your portfolio annually or after significant market moves.
- Sell assets that are overweight and reinvest in underperforming areas.
Why it works:
Rebalancing keeps your portfolio aligned with your risk tolerance and long-term goals.
7. Build a defensive core
A defensive core of stable investments can provide a cushion during market downturns.
Examples of defensive investments:
- Dividend-paying stocks: Established companies with consistent cash flows.
- Utility stocks: Essential services like water and electricity are less affected by market volatility.
- Consumer staples: Companies producing everyday necessities are typically more resilient in crises.
Why it works:
Defensive investments provide stability and income, even when markets are turbulent.
8. Avoid emotional decisions
Market downturns can lead to fear and panic selling, which often locks in losses.
How to stay disciplined:
- Stick to your financial plan, even during volatility.
- Avoid timing the market; focus on long-term goals.
- Consult with a financial advisor to navigate tough decisions objectively.
Why it works:
A steady approach prevents knee-jerk reactions that can derail your strategy.
9. Keep costs low
High fees can eat into returns, especially during volatile markets.
How to reduce costs:
- Use low-cost index funds and ETFs.
- Consolidate accounts to minimise administrative fees.
- Review management fees for actively managed investments.
Why it works:
Reducing costs ensures more of your money stays invested, increasing overall returns.
10. Work with a financial advisor
A professional can help you build a customised strategy to protect and grow your portfolio.
How an advisor adds value:
- Identifies risks specific to your situation.
- Develops a diversified, resilient investment plan.
- Provides guidance and reassurance during market fluctuations.
Why it works:
An experienced advisor can help you stay disciplined and focused on your long-term objectives.
Final thoughts
Markets may be booming now, but history shows us that bull markets don’t last forever. By diversifying, focusing on quality, and maintaining a disciplined approach, you can build a crisis-proof portfolio that withstands volatility and positions you for long-term success.
If you’re ready to create a portfolio designed to weather any storm, let’s chat. Together, we can build a strategy tailored to your goals and risk tolerance, ensuring your financial future stays on track.