Vice President of Business Development at Invictus Capital
The world has caught a chill. As efforts to contain COVID-19 aka the coronavirus heat up, global stock markets—the barometers for the world’s economic health—are flashing red. Compounding the virus fears was news of a Saudi-Russian conflict over oil prices, enough to catalyze a systemic collapse in global stock markets, with U.S. stocks counting their worst single-day losses since the 2008 financial crisis. Upon opening on March 9, U.S. stocks plunged so rapidly that the circuit breakers were triggered for the first time since 1997.
It appears the crypto market is not immune to the market fears either. As “bitcoin coronavirus” Google searches overtook “bitcoin halving” during the weekend of the stock market plunge, the top 20 cryptocurrencies shed more than 15 percent of their value in response.
Investors caught off guard will lament the fact that they should have seen this coming. These unpredictable “black swan” events are rare and devastating, sure, but they are to be expected. And corona won’t be the last of them.
So what should investors do when the world around them is falling apart?
Prevention is always better than cure. Ideally, investors would have constructed a diversified portfolio before any significant market downturns take place. If so, their portfolios might have only been mildly affected rather than suffering a full blown meltdown. But timing the market is impossible and hindsight is always 20/20.
Evangelical crypto investors who hold a significant portion of their wealth in digital coins are particularly exposed. A notoriously volatile asset, bitcoin lost 10 percent of its value in 24 hours last week, once again dispelling claims that it can be considered a safe-haven asset in times of global market turmoil.
Even if bitcoin proves its mettle as a safe-haven asset in the coming years, investors certainly should not be placing all their eggs in one basket. The only panacea that can protect portfolios is diversification—specifically, investing in uncorrelated assets.
The standard recommendation for most portfolios is some mix of equities and fixed income. Interest rates are at historic lows, driven by a decade of quantitative easing that has caused investors to turn to equities for returns. Long term bonds, such as the 10-year treasury bond, are now trading at a historically low yield of just 0.4 percent, compounded by recent market conditions. But even traditional investments liike equities cannot offer the best diversification.
Take the S&P 500, for instance, which is supposed to broadly represent the U.S. economy in a single, investable asset. Market pundits now dub the index “The S&P 5” given the sizable concentration of tech stocks. The tech giants (Apple, Google, Facebook, Amazon, Microsoft) make up only 1 percent of the companies in the index, yet they represent 20 percent of the market capitalization. Any price moves from those companies cause significant ripple effects across the index.
Investors looking to truly diversify their assets should consider alternative investments. Diversification means investing in asset classes that are not correlated to one another. Real estate, commodities, and hedge funds form part of the alternatives universe and have the benefit of having low or negative correlations to the more traditional assets. These asset classes provide a cushion to investors in times when traditional assets are in turmoil. Beyond diversification, alternative investments also provide a hedge against inflation, preserving long term wealth.
Turns out the panacea against the world collapsing is to take a pill of common sense and diversify your assets.
About Author: Nick Hill is the Vice President of Business Development at Invictus Capital. He is an experienced financial services professional with a background in financial engineering and FinTech. Nick’s skills and expertise include financial instrument valuation, financial modeling, and start-up valuation. Nick is a chartered accountant and a Chartered Financial Analyst. He holds a Masters in Finance.