How to invest in times of crisis?
Alexandra Janssen is head of asset management at Ecofin Group and shows how a broad understanding of diversification in investing provides security in times of crisis.
What is it all about?
Arming oneself against financial crises is a major challenge. What helped in the last crisis can hurt in the next one. For example, an investor got off relatively lightly in the crisis following "Black Thursday" on October 24, 1929, if he had invested primarily in government bonds. However, this strategy failed in the 1980s, when inflation soared. At that time, real estate was the better asset protection. Real estate, in turn, experienced a sharp decline in the following decade. These examples show: There is no one singular strategy that protects against crises. And crises cannot be systematically predicted, as science has shown.
What to do?
There is only one way to protect against crises: Diversification. On the one hand, diversification means "not putting all your eggs in one basket". Capital investments should be spread across different industries and regions. But diversification goes much further than that. Because in the financial markets, you can diversify not only financial portfolios, but also the risks of your own life. For example, a fintech entrepreneur can diversify the entrepreneurial risk in the financial markets with defensive investments outside the fintech universe. Or a family man can hedge his mortgage payment obligation in the financial markets. Depending on his or her life situation, an investor should manage credit, interest rate, equity and currency risks differently to diversify the risks of his or her own life and align investments with personal goals. If diversification is understood broadly in this way, it is a valuable means of arming oneself against crises.
Source: Oec. magazine issue #19