In the current environment characterized by high inflation and high-interest rates, strategies for preserving wealth take center stage. Key considerations when building an investment portfolio under these conditions include careful selection of assets, reduction of stock-specific risk, and maintaining adequate liquidity for quick maneuvers.
When investing in an environment of high inflation, it’s crucial to select assets that have a good chance of maintaining or increasing their value. For instance, US inflation-linked bonds and gold can provide a hedge against inflation, offering a way to preserve the value of investments in a time when inflation is eroding the purchasing power of money. At the same time, a more cautious approach might be taken with UK government bonds, which may not offer the same level of protection.
The reduction of stock-specific risk is another important strategy. By diversifying the portfolio and holding a larger number of stocks in smaller proportions, an investor can reduce the impact of any one stock’s poor performance on the overall portfolio. This approach can offer a more balanced risk distribution and helps to mitigate significant losses. Moreover, keeping a vigilant eye on the liquidity of the investments ensures the portfolio retains the flexibility to respond to changing market conditions.
The investment case for individual holdings is also a key consideration. Those who manage their money wisely take into account the outlook for economies and inflation when making decisions about which assets to hold. They remain patient and watchful, awaiting more favorable valuation situations to emerge.
When it comes to investing in the stock market, a preference is often given to companies that exhibit consistent revenues, such as software companies or firms that sell essentials or small luxuries. Avoiding companies with high leverage risk, business risk, cyclical risk, and valuation risk can help prevent large drawdowns in stocks. Additionally, steering clear of profitless companies and those with astronomical multiples, even when growth is present, aids in risk management.
Even though certain sectors like staples may be considered boring by some investors, they have demonstrated solid growth over the long term. Companies in this sector, such as those in the consumer goods industry, often present opportunities when they are out of favor and their stocks are undervalued. Buying into these companies can offer a healthy upside with little downside, ticking the box for wealth preservation.
Looking at the broader markets, some caution may be necessary when considering investments in sectors with high cyclicalities, such as mining and banking. These sectors can be particularly vulnerable in a downturn. However, opportunities are still being evaluated in markets such as the UK and Europe, especially as the landscape becomes more balanced compared to the US market.
Gold continues to play an essential role in investment portfolios, offering protection in a negative real interest rate world. The precious metal has proven to be a good diversifier, performing well in periods of heightened geopolitical or sovereign risk. Its price remains close to all-time highs, even in a turbulent market.
Finally, investing in US government bonds linked to inflation and short-dated gilts can also provide attractive returns. These bonds offer a hedge against inflation while also providing some protection if nominal yields fall. The risk/reward balance currently seems favorable for these types of bonds, especially in the context of wealth preservation in high-inflation environments. However, a cautious approach must be taken, given the potential for a long-term upward trajectory in yields.
