Interest rate swings, market volatility and global tensions make one thing clear: wealth management needs both protection and growth strategies to thrive.
Finding the balance between driving growth and safeguarding capital takes a disciplined approach to portfolio construction, but it could help your wealth to endure, despite the ups and downs of the market and the impact of inflation on your purchasing power.
Many investors equate balance with diversification alone. However, balance means understanding how each investment or exposure contributes to the twin goals of growth and protection and whether the portfolio is robust enough to withstand challenging times.
There’s no one-size-fits-all answer. Depending on age and stage in life, some investors are chasing aggressive growth while others want capital preservation.
Low-correlated investments are assets that don’t move in the same direction as equities, helping to reduce overall portfolio volatility. Their correlation to stocks is low or even negative. Examples include government bonds, gold, some hedge fund strategies and commodities.
Defensive assets are expected to hold their value or outperform during market downturns. They’re chosen for stability and capital protection. Examples include cash, high-quality bonds, defensive equities (such as utilities, healthcare) and infrastructure.
Growth typically comes from listed equities, private equity, venture capital, real assets and exposures to big, long-term trends that may cut across multiple sectors. For example, healthcare innovation, energy transition or AI.
The catch? Growth invariably means volatility. If the markets dive, you could feel pressure to sell at the worst time.
Defensive equities may help provide some balance. They’re shares in companies that tend to provide stable earnings and dividends regardless of whether the economy is booming or in a recession. They have strong cash flow because they sell needs rather than wants, such as power, food and medicine, and they have the ability to raise prices to cover rising costs without losing customers.
While portfolio protection starts with bonds and cash, some would say they’re not enough today, and a broader range of assets may be more beneficial.
Other protective strategies may include buying bonds that mature at different intervals, such as every year for five years.
Physical investments, or real assets, such as real estate, infrastructure, commodities, natural resources and equipment, can act as a hedge against inflation. When the cost-of-living increases, the value of physical assets tends to rise as well.
Alternatively, you could consider floating rate exposure or inflation-linked bonds (known as Treasury Indexed Bonds or TIBs in Australia and Treasury Inflation-Protected Securities or TIPS in the US).
Floating-rate bonds adjust interest payments as rates change, while TIBs increase principal and interest when inflation rises, providing a hedge against rising prices.
TIBs offer further protection with a built-in deflation floor that protects your original investment if prices fall.
If you invest globally, currency matters. So, foreign exchange planning should be an intentional decision rather than a portfolio by-product.
Although full exposure can swing returns wildly. On the other hand, a partial hedging policy, for example, hedging some developed-market bond exposures, may balance volatility and opportunity.
Finally, protection is a liquidity plan. For families using trusts, SMSFs or investment companies, keep enough cash or short-term assets to cover 12 – 24 months of cash needs (tax, capital calls, distributions). That’s real protection.
Please give us a call to check your portfolio meets your current needs for growth and protection.
Important information – Oracle Advisory Group makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.