5 investment strategies for HNIs in turbulent times

During tumultuous times, one should always root for basics. Excessive noise should be swept away, and only the nuts and bolts of the matter should be examined. An overt obsession with deeper analysis could lead to either hyper-action or paralysis in investment or portfolio decisions. Instead, this examination should be seen in conjunction with an aerial view perspective from above to avoid missing the bigger picture. A MECE (mutually exclusive, collectively exhaustive) analysis would incorporate both these aspects though correlations and sensitivities between some moving parts cannot be afforded to give a miss.

1. Be Objective and Rational while making decisions

On a related note, behavioural biases must be checked in challenging situations. One must always endeavour to behave like the typical rational human and take decisions objectively instead of responding to the news flows or market reactions. Utility functions and equivalent certainty returns should ideally not deviate significantly from Bayes’ theorem-derived expected values (returns). However, individuals often exhibit risk-averse behaviour instead of risk-neutral behaviour, which needs to be tempered, particularly in testing times.

2. Stick to your asset allocation policy

Investors should always stick to their asset allocation policy incorporating their SAA (strategic) and TAA (tactical). SAA would frequently stay the course even during turbulent times and typically includes the long-term needs and requirements of the investor. Tumultuous times could call for minor tweaks and adjustments in TAA to capitalise on or marginalise any mispriced opportunities or expected threats, respectively. Diversification between asset classes, sub-asset classes, managers, instruments, and geographies remains in mind.

3. Conduct Due Diligence

Conducting adequate due diligence is paramount; the help of the right subject-matter experts during crunch times also pays dividends. While seeking excessive corroboration or data mining to fit personal beliefs should not be encouraged, a specific measured amount of consensus gauging can help the investor arrive at well-rounded decisions. This is likely a good starting point for astute investment managers.

4. Validate the margin of safety while investing

Validation of the margin of safety is always pivotal for investment decisions, while it is much more critical during chaotic times. The risk of permanent loss of capital led by disruptions owing to the structural shifts in business and macro conditions could be real in such times. After adjusting to the market opportunity and realisable earnings, the value available to investors in the current price at the time of investing needs to be examined.

5. Create a buffer corpus

Liquidity management is quite an essential aspect for investors in general. Liquidity holds the key to optimising market opportunities from time to time, most specifically during volatile times. Adequate buffers would avert untimely exits from existing allocations to meet needs or to participate in market opportunities. Planning a separate investment policy for such a budgetary reserve fund is typically what institutional funds like sovereign budget stabilisation funds, pension funds, or savings funds resort to. Last but not least, as the famous saying “The will to win is important, yet the will to prepare is critical.”

Author: Rajesh Cheruvu, Managing Director and Chief Investment Officer, LGT Wealth India