The stock market is something that you cannot simply predict and time the market. It is the place where the best thing you can do is stay invested for the long-term. It is how you can create wealth over time. We all remembered the beginning of the year 2020 when the market was trading at all-time highs. It came out of nowhere and spoiled everything. It has changed life, as we have known it. The coronavirus has put the global economy into a recession. In such times, the investors are hesitating to continue to make stock investments as they have already incurred significant losses.
The interest rates globally are being reduced to near zero to make money cheaper and encourage businesses to borrow, spend, and invest. With the widespread unemployment, steep cut in salary, wealth destruction, and risk of more rising cases would require more policy actions.
As of now, the Reserve Bank of India (RBI) repo rate stands at 4 percent, the lowest it has ever been. Meanwhile, the 10-year bond yield is currently yielding 5.83 percent, the lowest in the decade. It is not just in India but in parts of Europe and Japan as well. The fact that the interest rates are at a decade low and likely to remain so, the interest offering in term deposits and small saving instruments will result in an outflow of funds from debt instruments. Consequently, the investors who are looking to invest in bonds as a diversification strategy against equities must stay away from the debt market for a while now. Investing in bonds will lead to low annual payouts and limited appreciation going forward.
Therefore, the question is, if the bond investing is not ideal then how to diversify the portfolio to balance the equity risks.
How to balance Equity Risks then…?
Interestingly, the same macroeconomic factors of heightened risk, low-interest rates, and high inflation are increasing the portfolio relevance of another asset class – gold. Gold is an asset class, which has a negative to zero correlation with risk-averse equities. Gold is typically the ‘Safe Haven’ asset in times of uncertainty and existing pandemic situation. Over the years, it has continued to perform well and displayed its sheen. During pandemic times, it has become the most lucrative asset to invest in and balance the equity risks. However, the demand for gold jewelry has taken a hit but the demand for the investment forms of gold is rising.
Giving the uncertainties in the equities and debt instruments, gold investing has the potential to receive potential returns. Investing in gold is a smart way to hedge the portfolio against equity risks and holding it with a long-term horizon can lead to higher returns.
The fact that interest rates are at a decade low, it will result in outflows of fund from debt to equity by domestic investors. However, there are risks of pandemic situations that may stay longer than expected. Any delays in medical solutions, alongside tension between India and China, can affect financial markets further.
In such a situation, gold investing can be a way to help to balance equity risks on investment portfolios while making investments that can lead to higher gains in the future.