After a period of quiet and calm, the volatility on the global markets has significantly increased as a result of China – US political tensions and downgrades in terms of growth of the leading European economies. Currently investors are surrounded by the controversial advice on where to invest which makes the search of the optimal money management strategy rather complicated. Therefore, in order to avoid the dilemma of “either-or”, it may be worth it to choose several investment ideas and sticking to them simultaneously rather than concentrating on a single one.
For those investors that are primarily looking for stability rather than for remarkable returns, fixed income instruments such as treasury bills, preferred stocks and savings bonds appear to be the safest option. However, the modest returns that low-risk investments tend to generate can be eroded by the inflation. Moreover, the tightening monetary policy is inflicting pain to the bond-holders.
As for the investors that are seeking growth of their capital, equity as an asset class may be a better match for the accomplishment of their long-term investment goals. Taking the volatility of the global markets into account, dividend-paying stocks appear to be more favorable compared to growth stocks, given current market conditions. Dividend-paying stocks generally are perceived as a safer alternative to the growth stocks since the companies, that offer the dividends in addition to the possibility of appreciation of stock price to the shareholders, tend to be more stable. That being the case, even if the value of the company goes down on the market, investors are being paid a regular income from holding such stocks, which helps to mitigate the risk of principal loss.
In other words, no matter what the investors are betting on – there is a considerable amount of risk to be assumed. The solution in this case could be the diversification via funds of funds, which, in a sense, are separate portfolios – adding these financial instruments to the portfolios will not serve as a panacea, yet it will help to reduce the risk by spreading the capital across different asset classes, geographies, industries and currencies.
Once the portfolio is formed, investors always have to be prepared to rebalance it in response to the changes in the market paradigm, since even the most efficient strategies require adjustments from time to time, especially under the conditions of political and macroeconomic uncertainty.