Investment strategies during uncertain times

Very often we confuse risk with uncertainty. This is true especially in the event of investing. Let's look back at what risk is, its an event or situation which involves exposure to danger.

It is associated with a measure of probability or possibility of an event happening in future which could adversely impact the current decision.

While uncertainty is pure opposite of certainty that is left to chance, unpredictable or no measure of any possibility to define the future event and so very difficult to assess our current decision making.

Going by day to day examples of risk: what are the odds of a person living beyond, say age 75. We could run through the historical data on demographics and come with a probability of an individual living up to age 75.

Of course, we discount his past and current habits, the lifestyle choices, the geography where he's domiciled, even the race, the overall life expectancy and the improving medical advancements. To benefit the accuracy we could discount the possibilities of newer diseases, etc.

Now, what are the examples of uncertainty: what are the chances of these events happening prior to these actual like that of 9/11 attack, the oil embargo in 70's, the trade war with China or even opening up of China in 90's, etc.

This is how investors should be looking at considering their variables while taking inputs for decision making. Unfortunately, we mix up or overlap these events to create a portfolio and make investment decisions. You could now see how grossly the decisions could lead to diverse outcomes.

So, when we resort to actions of actively trying to manipulate our investments through trying to time the market and take advantage of the opportunities provided, it could turn a futile exercise or the effort to reward may not be that attractive.

Even if one does not believe that markets are efficient, the data shows that they are great aggregators of averages i.e. despite our best efforts diligence always pays.

Before I complicate let me just do the plain talk. By mentioning about diligence, I meant about investing in an appropriate strategy through the troughs and peaks; to remain persistent to the all-pervasive market cycles and to trust ones instincts.

I know the word, appropriate, is very subjective and that's where one needs to tinker their goals, risk appetite along with their timelines. The appropriate strategy is a combination of these personal factors that would interact with extraneous factors of the markets and so this would be highly personalised.

And add to these are the behavioural-based factors which either limit or increase our risk and the risk-taking abilities. That defines an important factor for not just the portfolio construction but the final outcome.

So, what should be the action? The prudent strategy is to design a portfolio that has diversification across as many unique sources as one could identify, that suit the overall game plan.

This means by availing counter strategies to the various risks, one may unknowingly be building a lesser correlative investment avenue.

This is due to the advancement of financial products which reflect some or many of the other asset classes or have any of these assets classes as their underlying assets. That increases the skewedness in the portfolio and should be aware of.

By infusing dynamic asset allocation strategies and alternate investment avenues we could create better and more efficient portfolios.

These would not only reduce the volatility but also narrow the potential dispersion of returns thus mitigating the risks associated with traditional portfolios.

In conclusion, its not hugely about path-breaking strategy but about being vigilant, diversified and non-correlated portfolio which reflects the goals and aspirations of investors.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])