Investment Blog

We live in an uncertain world that is rapidly changing. The winners of yesterday will not be winners of tomorrow.

Mega themes like de-dollarization, deglobalization, climate change, and reshoring/friendshoring are shaping the world differently from what we have seen over the last few decades.

Excessive money supply with falling interest rates reaching zero in 2020 boosted asset prices worldwide, leading to a widening gap between haves and have-nots. This dissonance has been one of the catalysts driving major fundamental changes in how the world was operating.

Changing world order brings a lot of challenges. It needs deftness & wisdom to navigate the finances & investment portfolio.

In such an uncertain world, how should one construct a portfolio that weathers negative surprises and delivers decent returns to hedge against inflation risk?

The portfolios should be designed on 3 fundamental blocks:

1. Asset class diversification: High concentration in one asset class can be disastrous for the portfolio due to either expensive prices or changing global trends. Therefore, a portfolio should be diversified across asset classes like equity, debt, gold, and real estate. An asset class that has risen over the last decade may not perform well over the next decade. Therefore, one must not concentrate their portfolios in one asset class. Diversification across asset classes should be designed as per the risk profile.

2. Geographical diversification: Most of the portfolios get invested in the areas of familiarity. However, in this uncertain world, nobody can be sure about which country will thrive and which will decline with a high level of conviction. Therefore, diversifying across geographies becomes essential to hedge against country-specific risks.

3. Value-based investing: Any asset class or sector that is known by everyone to deliver the best outcome would already be priced very high. These pockets thus offer much higher downside risks because any change in the narrative or negative surprises (very common) would lead to severe damage to stock prices. Therefore, high portfolio concentration on popular themes should be avoided. Allocation should be done across sectors that may have been ignored by most of the market participants, thus offering reasonable value.

The thesis behind the above suggestions is to create a sturdy portfolio that weathers any negative impact due to the changing world order. The current times are about surviving the change and not maximizing the returns. Successfully surviving this change will itself lead to thriving gains in the future.

Originally posted on LinkedIn: www.linkedin.com/sumitduseja