Where should you be invested when the market crashes?

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Investment advisors and financial experts preach time and again that there is no alternative to investing in the stock market. Even if investors should always consider stocks when making their investment decision, an ideal portfolio is more broadly diversified.


DANIEL ROLAND/AFP/Getty Images


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DANIEL ROLAND/AFP/Getty Images


?? No alternative to the stock market for investors?

?? Why diversification is important

?? Which investment opportunities are still available

In recent years, the stock market has presented itself as a no-alternative investment opportunity. Anyone who wanted to invest money could not avoid stocks. This was confirmed again in 2020, the year in which the corona pandemic hit markets around the world and seriously thrown economic development out of balance. The collapse of the stock markets in March, caused by lockdown consequences and deep economic cuts on a global level, is now little more than a setback. The stock markets started a rapid catch-up race in the following months, in some cases even new record highs could be seen.

But the recovery on the stock exchanges was primarily due to the massive intervention of the international central banks, which flooded the market with money to cushion the effects of the pandemic on the economy.

For some time, observers and experts have been warning of a bubble formation, because the monetary authorities have Low interest rates and cheap money will not affect market developments until this year. Are stocks too expensive and does the crash, which could bring tech stocks in particular back to healthier levels, inevitably have to come? Or are investors who are hoping for a reasonable return doomed to continue investing in the stock market?

Diversification of the types of investment is the key

One thing is certain: if you want to avoid the risk of losing a large part of your assets in the event of a stock market crash, you cannot avoid diversifying the types of investment in your portfolio. But not every form of investment is actually suitable for reducing risk.

Anyone who invests their money in the bond market, for example, will always stay below what equity investments offer in terms of returns. Bonds, however, are considered to be a comparatively safe capital investment. Anyone who invests part of their investment funds in the bond market will spread their risk of loss. How high the proportion of bonds in the portfolio should bedepends largely on personal return expectations and the investment horizon.

Are gold investments worthwhile?

Commodity investments are also suitable for diversifying your own portfolio and reducing your risk of loss on the stock market. Many experts name above all Gold as an ideal way to reduce reliance on equity investments. Because the precious metal is considered a safe haven – in the past, the gold price has often developed in the opposite direction to the stock market. This negative correlation is not reliable in times when panic breaks out among investors and market participants want to make all investments liquid, but in the long term it is confirmed that gold and stocks often show contrary developments.

Investors are spoiled for choice – if they decide to purchase physical gold, they are often faced with a storage problem. Gold ETFs, on the other hand, which are backed with physical gold, are believed by some experts to be speculative. Fund expert Jeffrey Gundlach, for example, recently warned: “Do not think that you will get the physical metal back”. Holding gold stocks is not the same as owning gold bars, “paper gold” ETFs are against this background “little more than a speculative vehicle”warned the fund manager. What happens if physical gold should actually become scarce and everyone simply wants to turn their paper gold into gold?

And other experts also see the decoupling of the physical gold market from the paper gold market No longer uncritical.

But despite the criticism: If you take the hardly existing or negative correlation between gold and stock markets as the basis of your investment decision, it makes sense to include gold in your own portfolio for diversification. In order to further reduce the risk here, too, in the best case scenario, there should be a diversification into physical and paper gold.

What about crypto investments?

In connection with the hedging of the share portfolio, cryptocurrencies have also increasingly become the focus of investors in recent months. Because with increasing adaptation, digital currencies lose part of their speculative character. In addition, they share an important characteristic with gold, the currency in crisis: they are limited in quantity and – unlike fiat currencies, for example – cannot be created indefinitely.

But the supposedly low correlation between crypto currencies and stocks could not always be maintained in the past. So he had to Bitcoin suffered massive losses in March in line with the stock markets – those who backed the crypto currency in order to be less affected by the crash in stocks could not benefit from the hoped-for diversification effect. In addition, digital coins such as Bitcoin differ fundamentally from gold in one thing: They lack intrinsic value. The precious metal is likely to remain relatively stable in value even in times of need – this does not apply to Bitcoin & Co.

Nevertheless, it can still be worthwhile to have invested part of your deposit in cryptocurrencies. Because the adaptation is expected to continue. In times when central banks are now also thinking about digital counterparts to fiat currencies, investors should at least monitor developments in the crypto market closely.

What cat bonds promise

An asset class that does not correlate with the stock market are so-called cat bonds. Catastrophe bonds, as they are also called in German-speaking countries, are often issued by insurers who pass their risks on to the capital market. Investors who take on part of the risk in the event of a possible catastrophe through cat bonds are compensated for this with an attractive premium.

Possible catastrophes include earthquakes or hurricanes, i.e. natural events that are completely independent of geopolitical factors or economic development – elementary factors influencing the development of the stock market. This decoupling from the traditional market makes cat bonds particularly interesting for those interested in diversification.

If a predefined catastrophe does not occur, investors benefit particularly from the higher interest rates. If the event occurs, however, the interest rate declines; in the worst case, the bond will not be repaid at all.

In view of global climate developments, the need for catastrophe bonds is likely to continue to grow in the future, as the occurrence of major environmental disasters is increasingly likely. The number of cat bond products will probably continue to rise so that investors can choose from a wide variety of different products.

Spread also in the share portfolio

In addition to diversifying your own Investment With regard to investment variants, investors who bet on stocks should also be broadly positioned within this asset class. Those who primarily stock up on high-growth tech stocks run the risk of suffering greater losses in the event of a crash than investors who are also invested in various industries.

It always makes sense to take a look at the dividend policies of different companies, because dividend stocks are also suitable for diversification. Investors should particularly focus on stocks that are characterized by continuous dividend payments and that increase dividends at regular intervals. In this way, part of possible losses on the stock market can be offset, even if one has primarily focused on equity investments.

Investment far away from the stock market

Irrespective of this, investors also have opportunities outside of the capital market to invest their money without taking any equity risk. This particularly includes investments in startups.

Lenders or co-owners – for example through crowdinvesting – take a not inconsiderable risk, because numerous startups disappear only a short time after they are founded because their business model was not as promising and profitable as hoped.

The fact is: if you want to avoid equity risk, you have to avoid stocks. Anyone who wants to reduce equity risk cannot avoid diversification. A broad diversification of risk protects against losses and prevents excessive fluctuations in the portfolio.

Finanzen.net editorial team

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