CoronavirusMay 28 2021

Four ways to navigate investment challenges in a post-Covid world

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Four ways to navigate investment challenges in a post-Covid world
Credit: Lukas via Pexels

Since Covid-19 turned the world upside down, it is unsurprising that many investors’ risk appetite and objectives have evolved.

Some investors may have dialled down their risk tolerance, while others aiming to meet short-term ambitions may have pushed out their horizons, thinking about the future a little more carefully.

Many will be seeking a solution that will serve them through all weathers. 

Navigating the current market backdrop has undoubtedly presented new challenges to investors.

While financial markets – and the companies and economies that underpin them - remain susceptible to Covid-19-related shocks and dramatic falls in investor sentiment, major structural shifts through the pandemic have also changed the way traditional correlations are playing out across portfolios. 

For example, with record levels of monetary and fiscal stimulus continuing to support large parts of the global economy, the outlook for fixed income, and its role in diversified portfolios, has come to look radically different.  

Inflation risks 

As economies re-open, many investors will be keeping a watchful eye on headline inflation figures. Given that markets tend to be more volatile when inflation is rising, and in view of current elevated valuations across equity markets, some investors may be questioning whether this is the right time to invest – or stay invested – in equity markets.

Despite the potential for volatility in the short term, we know the dangers of delaying investing or pulling money out of the market too soon.

Over the coming months, we expect to see a much stronger post-Covid economic restart – rather than a more normal recovery. This backdrop increases the breadth of the opportunity set – but also heightens the risks in a more uncertain environment. 

While the restart bolsters our pro-risk stance over the next six to 12 months, many investors do not want to take active decisions on a short- or even long-term basis.

Low-cost, long-term diversification can deliver an all-weather solution for those wishing to avoid having to ‘time’ the markets in order to benefit from the Covid recovery.

By investing in a risk-managed, cost-effective multi-asset vehicle, investors can aim to participate in the upside, mitigate the downside and, critically, can benefit from being in the market long term. 

While financial markets – and the companies and economies that underpin them - remain susceptible to Covid-19-related shocks and dramatic falls in investor sentiment, major structural shifts through the pandemic have also changed the way traditional correlations are playing out across portfolios. 

Navigating the journey

In our view, there are four core factors that could help investors navigate a more uncertain environment. 

Build diversified portfolios 

Asset allocation and risk management processes are designed to correspond with where investors are in their financial journey and where they wish to get to.

A traditional 50/50 bond to equity portfolio will likely see volatility spike at key points in the market cycle, while more dynamic asset allocation looks to manage volatility at a suitable level whatever is happening in the wider market. 

When building a portfolio, a multi-asset approach aims to provide a level of diversification that can protect returns over time, even when markets are volatile.

By investing in assets with different patterns of returns, such as equities and bonds, as well as a small number of other asset classes that add further diversification, such as physical gold, investors are more likely to temper losses through falling markets.

Focus on risk

Many investors are understandably concerned about the risks their portfolios are taking and whether those risks are right for them, especially in today’s changeable conditions.

Take the time to ensure that any fund – or allocation – in portfolios matches investors’ risk tolerance.

Many funds have a predefined volatility band, which is vital to pursuing the right balance of risk and return potential – one that reflects investors’ individual financial position and investment goals. 

Despite the potential for volatility in the short term, we know the dangers of delaying investing or pulling money out of the market too soon.

Keep an eye on costs

From a cost perspective, investors can benefit by accessing a product which keeps costs low, while still providing access to wider global investment expertise.

Some fund ranges are built using low-cost funds that track the performance of stock and bond markets but are overlaid with the active management of professional fund managers to invest in different funds based on where they see the best return potential. 

Think sustainably 

The world is changing, and investors are becoming increasingly concerned about the impact their investments are having.

The demand for ESG funds is clear: even in a volatile year like 2020, in aggregate, ESG funds experienced positive inflows versus their traditional peers.

Yet many investors may also be concerned that investing in an environmental, social and governance (ESG) fund is both expensive and can weigh on performance.

From a cost perspective, investors can benefit by accessing a product which keeps costs low, while still providing access to wider global investment expertise.

Investors who wish to see specific values reflected in their investments should rest assured that there are low-cost opportunities out there to make a long-term difference, while delivering long-term returns. 

When it comes to setting up a balanced portfolio that reflects investors’ finances, risk tolerances and goals, it is important to think broadly across risk, return and cost. More often than not, an all-weather portfolio - nothing fancy but suitable for all conditions - is required. 

Joe Parkin is head of UK Banks and Digital Channels at BlackRock