Resiliency is the name of the game when it comes to building an investment portfolio that can stand up to the changes and demands of the real world. While anyone can structure a potentially lucrative investment portfolio on paper, it’s being able to adapt while maintaining winning positions that matters. The world is dynamic, free-flowing, and uncertain in so many ways that we are never able to fully quantify. The key is having a mindset and a portfolio structure that accepts this as an inherent property of any market.

With this in mind, we want to step back from specific markets and focus on a bigger-picture view. Our belief is that with the right viewpoint when it comes to the importance of resilience, you will be able to build portfolios across multiple markets that optimize the probability of higher returns.

What Is Economic Resilience?

Let’s start by considering an economy as a whole, rather than your investment portfolio in particular. Economic resilience is the ability of the economy to absorb, resist, and then recover from shocks. Monetary crises, natural disasters, changes to mortgage rates, economic downturns, and violent conflicts will all derail the world economy in specific ways and to certain degrees.

If the economy is resilient, it will be able to act in a way that minimises the loss of money and personal welfare for as many people as possible. Hyper-resilient economies will even be able to adapt to the changing environment and emerge even stronger. The two key things that need to be considered here are:

  • Adaptive Capacity: By how much can the economy change to meet the demands of the new economic landscape
  • Transformative Capacity: The degree to which the economy can restructure itself so that it is ready for the next shock

Now consider that, rather than structuring the economy, you are only structuring your personal investment portfolio. Building resilience into your portfolio from day one will ensure that it can adapt and grow in the face of sudden shocks, maximising the probability that you will continue to secure a lucrative return.

Developing A Resilience Mindset

Resilience starts to become a mindset the moment that you decide to take a proactive approach to monitoring market movements, shifts, and changes. Understanding how seemingly disconnected elements of the global economy can impact your portfolio is vital here. Rather than waiting for the value of your holding to drop, you go on the front foot and ensure that you have as much data and information as you possibly can.

You have now switched from a reactive to a proactive approach to managing your portfolio, and it’s this shift that creates resilience. You are now allowing your portfolio to display resilience in the face of uncertain and unpredictable market behaviour.

To achieve this in practical terms, you will need to scientifically monitor interest rates and inflation levels. Doing so provides insights into how long-term returns from your portfolio may come under increasing pressure from value erosion in the months ahead. You will also need to ensure that you are fully briefed when it comes to trade errors, liquidity gaps, and disruptive entrants to markets.

A resilient investor understands that they will never achieve 100% accuracy, but that by changing the way they think about change, they can minimise risk exposure at every turn. As a by-product, they then give themselves the best possible opportunity to both adapt and rebound while others remain wed to static, immovable strategies.

Focus On Tail Risks

When the value of an asset drops by three standard deviations or more, something significant is happening. Being able to take steps across your portfolio that mitigate the impact of these shifts is vitally important. Diversification is required to provide the investor with options, and it needs to go far beyond simply moving from shares in three companies to shares in 10 or more.

Real resilience comes from touching multiple markets at the same time, allowing you to react and adapt while also taking advantage of the interconnected nature of the global economy. Thinking of your portfolio as a network that is dynamic and flexible is the best approach to take here, whether that means equities, commodities, or even emerging areas like blockchain.

Gold Offers Resilience Against Geopolitics

As any commodities trading broker will tell you, gold has a historical tendency to hold its value better than many other types of investments. Share prices can go up and down based on a simple change of CEO, oil prices are always shocked by conflicts, and there have even been cases when entire banks have failed and had to be bailed out.

The intrinsic value of gold is based on the fact that people all over the world continue to want to own it, and this means that including it as a component of your investment portfolio matters. Being able to provide some degree of protection against political posturing and armed conflict will introduce resilience to your portfolio.

Core Infrastructure Safeguards Against Inflation

We’re going to keep this point short and to the point: every country will always need public services and essential infrastructure. Trains, roads, utilities, and energy generation are all, therefore, areas that your portfolio should cover. Doing so allows you to take in some of the value created by services that everyone will continue to need, regardless of things like the cost of borrowing or the rate of inflation. Including a component that covers emerging green energy sources is also a way to bridge the gap between this point and the one that we’ve included next.

Equities Offer Faster Potential Growth

Buying shares in companies that are operating in high-growth industries will enable you to ride the crest of a wave. Shares in Oracle, for example, are currently riding at stratospheric levels as AI companies turn to them to provide much of the infrastructure that they need to be able to function. Identifying these latest growth trends can give you the chance to access higher-level returns.

Structuring Notes Introduces Flexibility

The goal here is to try to cover as many bases as possible, but in a way that gives you plenty of elasticity and flexibility when it’s time to consider your next sequence of moves. By making sure that you cover a range of distinctly different positions, you can provide yourself with useful starting points when you come to reset your overall strategy.

You could think of these notes as footholds that give you the opportunity to realign your portfolio’s overall direction with the direction of travel of the economy. This approach requires a great deal of practice and preparation, so you may find that working intensively with a demo trading simulator helps. It will allow you to test different weightings and combinations without the risk of losing real capital.

Final Thoughts

Resilience is all about giving your portfolio the tools it needs to be able to adapt and thrive regardless of the wider economic landscape. No approach is ever going to be 100% accurate, but what you can do is optimise your chances of securing a return by adopting a resilience mindset. Knowing that you need as much data and as many options as possible, you will be able to shift from a reactive position to one that is very much proactive. Do this, and you will be able to optimise the way you ride out uncertainty and economic shocks.

This industry announcement article is for informational and educational purposes only and does not constitute financial or investment advice.