When and how to introduce risk into your portfolio

  • Explain some of the challenges in investments right now
  • Identify a way of mitigating volatility
  • Describe possible alternatives to equity income
When and how to introduce risk into your portfolio

Until there is a significant and prolonged reduction in the number of cases of Covid-19, a sense of uncertainly is set to weigh on almost all aspects of life, from a domestic level to a corporate and national level. 

Uncertainty is no friend to markets and the first quarter of 2020 has seen some extraordinary market crashes and surprising bear market rallies. 

Against this backdrop, punch drunk investors can be forgiven for being at a loss over whether they should continue to position their portfolios defensively or start to consider ways to reintroduce risk.

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Government action

It is apparent that governments and central banks are prepared to take drastic steps to support the global economy.

The hope is that by keeping some of its wheels turning during the darkest hours of this crisis, a return to some resemblance of normality might be easier to achieve.

In the US, Congress has released $2 trillion to help individuals and businesses directly affected by the virus, while the Federal Reserve has assembled a $2.2 trillion bundle of loans and liquidity support to help markets and businesses through these difficult times. 

In the meantime, the European Commission has placed a €1 trillion Recovery Fund at the centre of EU negotiations, while closer to home the Chancellor of the Exchequer has confirmed £330bn of government-backed loans to support the financial health of the nation.

Furthermore, the practice of furloughing employees, albeit at reduced wages, should mean that a large part of the workforce remains intact and is able to resume activities once a phased return to work is introduced. 

This, it is hoped, will support a more rapid economic recovery once the worst of the pandemic is over.  

By trying to ensure that money continues to flow through the system, governments might be able to offset the worst impacts of the economic shock caused by the collapse in demand for goods and services.

Some sections of the economy, hospitality for example, will be slow to resume normal business once the worst of the crisis is over. 

However, others will enjoy the benefit of pent up demand which may lead to a more rapid economic recovery than might be expected.

Indeed, history suggests that the rebound following external events such as this pandemic can be very vigorous and quite different from the drawn-out recovery experienced in the aftermath of the credit crunch of 2008, due to the structural issues within the banking sector that caused it.  

Despite these best efforts to reassure, uncertainty still persists over what the world will look like in the aftermath of the Covid-19 crisis. 

Speed of economic recovery

It seems a given that the global economy is heading for a deep recession, but how quickly it recovers depends upon the speed and success of plans to transition life and business back to normal. 

The process is likely to be slow and setbacks are inevitable as governments across the globe roll out plans appropriate to levels of infection within their populations and the stage they are at in combating the virus.