Harry Max Markowitz, an American economist, and Nobel Laureate, said, “Diversification is the only free lunch” in investing.
During the 1980s, investors noticed the Japanese stock market had been performing well for decades due to its rapid economic development.
Countries like Hong Kong, Singapore, Korea, and Taiwan successfully adopted similar industrialization strategies and were coined as emerging markets.
Investment portfolios in the US and Europe were exposed to the struggles of their domestic manufacturing industries as globalisation accelerated, triggering an asset allocation shift from developed markets to emerging market equities.
The developing world has enjoyed rapid economic progress in the last few decades, and the emerging market term no longer captures the complete picture. Investors need to embrace a more nuanced view.
Diversification across geographies has proved effective in generating returns while mitigating risk in the past.
However, in the year 2020, when the markets crashed due to the recessionary fears caused by the COVID-19 pandemic, diversification across equities globally disappeared when needed the most.
As globalisation progressed, the economies became intricate, increasing the correlation between the global equity markets.
Diversifying portfolios across asset classes should preserve them from the vulnerability of extreme price movements. While economically-correlated assets suffer simultaneously during recessions, asset classes that are less sensitive reduce the risk to the portfolio.
Investors can typically use these assets to hedge their portfolios against bad times. Domestic government bonds can protect investors against the risks of deflation.
Holding cash dampens portfolio volatility and allows investors to buy at lower prices during market crashes. Gold typically performs well when the threat of inflation persists for a longer period or during political uncertainties.
Investors can derive from Exhibit 1 that no asset class consistently outperforms others in the short term, and the 10-year CAGR construes investing over a longer horizon will compound wealth.
We have back-tested and noticed that even a vanilla hybrid fund (60% in equities & 40% in debt) could optimise return and mitigate volatility for the risk taken. The grounds for that are that asset classes, barring a few exceptions, tend to be influenced inconsistently by macroeconomic occurrences, yielding better risk-return trade-offs.
The appropriate proportion of capital allocated to assets is crucial in building an optimal portfolio. If not, investors are exposed to unwarranted risk; for example, if an investor were to invest 100% of the capital in the index, they would be exposed to undue volatility.
However, tactical asset allocation will integrate capital market expectations with investors’ desired level of risk and constraints, focusing on the long term as exposures are targeted based on the quantifiable systemic risk of each asset class and generating maximum returns for the risk an investor can hold.
Technological advances are disrupting the economy and markets, creating a more granular 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 equity unless they have a thorough understanding of the business.
If not, consult a financial advisor or the simplest and most effective strategy to follow is the systematic investment plan in two or three selective mutual funds.
Millennials often look at real estate with emotions and plan on buying houses earlier in their lives.
However, we suggest prioritising and allocating more towards equities in the initial stages and eventually increasing allocation to real estate, debt, and gold since equities will provide higher returns relative to other asset classes in the long run.
(The author is Founder and fund manager, Right Horizons)
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
