Samuel Barbosa -investment portfolio

Diversification and patience: how to protect your investment portfolio during a pandemic

COVID-19 has hit the Japanese economy hard. The third biggest economy in the world saw GDP fall by 7.8% between April and June 2020 compared with the previous quarter.

This is the fastest contraction of the Japanese economy on record, exacerbated by the fact that economic growth was sluggish even before the pandemic. These recently released figures highlight the enormous negative financial impact faced by economies around the world. So, wherever you are in the world, what’s the best way to protect your investment portfolio during a pandemic?

How is the current global economy affecting your investment portfolio?

It’s a tense time for investors as countries are hit by recession after recession. Over in the UK, the economy contracted by 20.4% between April and June, compared with Q1 2020. This is another record-breaking slump.

The pandemic is causing enormous ups and downs across the stock market, and in other asset classes such as gold, oil, property, and bonds. It’s important for investors to understand the possible impact of the current economic climate on their portfolios and how to guard against volatility.

Global stock markets began plunging towards the end of February 2020 as the pandemic began to rear its head. On 9 March, the FTSE 100 suffered the biggest one day fall since the financial crisis in 2008. Although some stock markets began to recover relatively quickly, the watchword since then has been volatility.

Asian markets are suffering significant declines. India’s BSE Sensex and the Hang Seng in Hong Kong both endured significant losses in March 2020. The US is dealing with similar losses, as the Dow Jones Industrial Average fell 22% between 9 and 23 March – although it rose by 15% by 5 August.

Investors looking to Japan in wake of dividend freeze in West

Businesses of all types are under immense pressure, as stocks continue to renege on the 2020 forecasts from before COVID-19. And of course, there is no clarity surrounding when any kind of normality will resume, which means earnings are uncertain into 2021 and beyond.

Companies in the US, across Europe and in the UK are collectively slashing shareholder returns as a result. This is unsurprising given that share buybacks and reduced dividends can provide financial insulation during tough times. However, while firms focus on cost-savings, investors are thrust into uncertain territory. As we see regions in the West falter, Japan is stepping up.

Historically, shareholders and companies in Japan have had rather difficult relationships. But over the last decade, there has been a concerted effort to change this under Prime Minister Shinzo Abe, who resigned at the end of August due to health problems. These measures drove the Nikkei dividend index up to hit a record high last year.

Japan’s economic success is partly down to the historical resilience of its corporate culture. Having a cash safety net while always expecting the unexpected has left Japan in a more positive position than other countries at this time of crisis. Data from Daiwa Securities indicates that dividend pay-outs will remain relatively steady, in direct contrast with countries in the west.

For example, in the UK Lloyds, NatWest, HSBC and other big banks completely scrapped 2020 dividends at the start of Q2 2020. Meanwhile in Japan, two of the largest financial institutions (Mitsubishi UFJ Holdings and Sumitomo Mitsui Financial Group were able to commit to maintaining year-on-year dividends. The dividend stability in Japan will appeal to investors, who will increasingly turn their attention to this country.

Tips to protect and future-proof your investment portfolio

It’s too early to accurately predict how the global economic recovery following COVID-19 will play out. There are some positive sides, with housing markets picking up. However, rising unemployment in many countries has a knock-on effect on investment optimism. Investors will increasingly turn to high quality growth stocks and safe assets like gold.

Against this complex and changing background, here are some of my tips to protect your investment portfolio:

  • Long-term investors – don’t panic

This is probably the most important tip I can give. If you are looking ahead more than five years, think ahead and sit tight. It’s extremely difficult to think like this when the global economic situation is so unstable. However, despite seemingly endless turbulence, there will be a time when it stabilises. It’s important to continue investing with an eye on the longer term.

  • Review your investment goals

I know it’s difficult to just sit and wait, so if you’re looking for action take the time to review your investment goals. What do you really want to achieve and is there any positive action you can take right now to get closer? Think of it as an investment MOT.

  • Diversify your investments

Do not put all your money or faith in one asset class. Ensure that you are diversifying your portfolio and consider totally new asset classes. Turn to assets that traditionally perform well when investors are risk averse. Absolute return funds, government bonds and gold are good options. These assets are good at capital preservation rather than high-growth companies. Gold has increased in value by more than a third so far in 2020, and while this could change every investment portfolio would benefit from gold.

  • Accept that the market is volatile

Volatility in stocks is part of the investment process. It’s not always possible to accurately predict the future of your investments and to a certain extent you need to be able to ride out the rough times. COVID-19 is evolving all of the time and at the moment no-one can predict what will happen.