How investors properly secure their portfolio

Frankfurt The shock reaction of the capital markets to Russia’s invasion of Ukraine raises one of the key questions about investing: How much price fluctuation can an investor tolerate? This stock market tremor could serve as an opportunity to see whether the investment structure suits one’s own risk perception or whether it needs to be readjusted.

In any case, capital market strategists now consider one thing to be a blatant mistake: “Under no circumstances should investors rush into action,” warns Ulrich Kater, chief economist at the savings bank subsidiary Dekabank. Because anyone who panics and throws securities that are susceptible to fluctuations, such as shares, out of the portfolio is making possible current book losses real. And with that, there is no longer a chance to offset the minus in a recovery movement.

In the short term, most strategists fear further setbacks, especially for equities, depending on how things develop. “The situation is still too confusing to reposition yourself,” says Carsten Mumm, chief economist at Bank Donner & Reuschel. It is not yet foreseeable “how low prices can actually slide”.

Sandra Ebener, economist at Union Investment, also emphasizes the uncertainty of the situation. “Neither the Russian targets nor the Western countermeasures are clear.”

However, most capital market experts are not anticipating long-term upheavals. In the past, military conflicts usually only resulted in short-term setbacks on the stock markets, says Mumm.

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Investors should be “clear, especially in times like these, that stocks are long-term investments,” agrees Martin Lück, chief investment strategist for Germany and Eastern Europe at Blackrock. As soon as it becomes clearer how Russia’s war of aggression will develop, for example that other states do not have to fear an invasion, the first investors should be willing to see through the shock.

Kater von der Deka also emphasizes this: Equity investors should be long-term oriented – and in the long term he too remains confident about the stock markets. “As regrettable as the development is from a political point of view and as significant as the long-term geopolitical changes can be, the economy will have to and be able to live with the new framework conditions,” says the Deka chief economist. He is certain: “The stock markets will recover.”

In general, however, difficult times like these make it clear that every investor should build up a portfolio with which they can sleep peacefully. Anyone who thinks about their portfolio assets with concern at night is well advised to readjust the structure.

It is clear that a depot is considered to be all the more promising the larger the proportion of equities – the asset class with the longest long-term potential for returns. However, if you get nervous at the sight of a loss of almost 15 percent in the German Dax since the beginning of the year, strategists advise you to put less on the stock market.

A rule of thumb says: If you can tolerate a 20 percent drop in the meantime, you can take 40 percent shares into your portfolio. Because the fact that stock markets fall by half happens again and again, as a look at the past shows.

So if the thought of his custody account does not leave you in peace now, you could sell a few shares that have been doing well recently and thus reduce your share of dividend stocks. The investor could park the equivalent value in an account or, like many investors, put it in bonds from Western countries that are considered safe. Gold is currently also suitable as a crisis parking space. Instead, cryptocurrencies, which have long been traded as such, are under significant pressure.

The price of gold climbed around three percent on Thursday to a one and a half year high. The most important cryptocurrency Bitcoin, on the other hand, was down almost nine percent. Depending on the situation, many fund managers hold up to ten percent of their assets in the precious metal.

If you don’t want to bet fully on equities, you can generally buy mixed funds from different securities, which mostly focus on equities and bonds. Or take various exchange-traded index funds ETF into the portfolio that replicate stock and bond indices.

However, investors can also spread risks widely within the important asset class equities: regionally and by sector. One way is to bet on whole indices.

The whole world can be easily represented in a broad world stock index: The MSCI All County World (MSCI ACWI) combines developed markets and emerging countries. The latter make up twelve percent of the MSCI ACWI.

This means that investors are already positioning themselves more broadly than, for example, in the popular MSCI World index, which includes 1,600 stocks from 23 industrialized countries. But since this is weighted by stock market valuation, which is particularly high in the US, US stocks alone make up nearly 70 percent of the index.

In order to spread the risk in the portfolio, investors can also simply combine ETFs from different regions. With index funds from the large countries or continents of the USA, Europe, Japan and the emerging countries, they achieve a portfolio mix of shares that, according to statistical analysis, develops less in the same direction than, for example, the MSCI World. Experience has shown that this makes the equity component more robust, even for regional conflicts like the current one, but this is no guarantee against book losses.

More: Investors should remain calm and wait and see