- Market expert Nigel Green says that portfolio diversification is the key to protecting wealth
- He suggests investing in alternative investments
- He also advises investors to keep invested in the market downturn
Investors need to protect their investments and long-term wealth against soaring inflation and rising interest rates by revising which assets make up their portfolios.
That’s the clear message from Nigel Green, the chief executive and founder of deVere Group, a global financial advisory company.
Green says that long term and short duration assets respond differently to rising inflation and interest rates.
“Short duration assets include value stocks, such as agriculture, financials, mining and energy sectors.
“These are the stocks that offer ‘jam today’ for investors, which are popular during periods of volatility as we’re experiencing now,” explained Green.
“Long duration assets, such as long-dated bonds and tech stocks, are particularly vulnerable to rising inflation and interest rate hikes from major Western central banks.”
According to Green, central banks are currently facing a dilemma, as their current aim of making money more expensive in order to weaken demand could cause mass unemployment and trigger a recession.
“Rising interest rates, amid weakening business and household demand, is bad news for both bond and stock markets.
“Meanwhile inflation will eat into company profit margins for many companies, particularly those selling discretionary products that businesses and consumers can delay purchasing.”
All this will create market volatility, and in this macro landscape, Green advises investors to seek both capital appreciation, and capital preservation.
This could mean investing into less familiar, return-enhancing asset classes which include venture capital, structured products, high dividend stocks, hedge funds and managed futures, and real estate amongst others.
Green says these investments are likely to increase diversification and reduce volatility, due to their low correlations to the more traditional investments; and they can hedge some portfolio exposures.
He added that it’s impossible to know how much of the inflation and interest rate story is already baked-in to stock and bond market prices, but investors are anticipating further market volatility.
The VIX ‘fear gauge’ index of implied future volatility on the S&P500 for example, ended last week at a historically high level of 31.
“It’s true that equities have tended to outperform bonds and other assets over the long term.
“But a broadly diversified portfolio of equities, bonds, commodities and alternatives has performed better on a risk-adjusted basis, after taking into account volatility.”
“As ever, bouts of market volatility are the times when most opportunities are presented for investors looking to build long-term wealth.
“That said, investors should consider if they need to revise their portfolios in the current environment,” Green added.
‘Stay invested’
Green also says history has taught us that bear markets are usually major opportunities to build wealth for investors who top-up their portfolios with quality stocks at lower prices.
“The panic-selling of the last few days has created some important long-term opportunities with high upside potential and low risk possibilities for those who buy judiciously,” he said.
“There’s no doubt that some fortunes will be made in this bear market, like in others before.”
The last bear market was in 2020, but it was unusually short as it only lasted about a month. According to Green, the current one is likely to be longer due to the slew of contributing factors that are fuelling it.
Green advised that in this volatile environment, investors should stay invested in the market.
“Do not sell unless you urgently need the money – and to ensure your portfolios are properly diversified, which is your best way to mitigate risks and reap rewards,” he said.
“Your future self will thank you. The average bear market lasts less than a year and they typically rebound stronger than before.”
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.