Investing always comes with a risk of loss, and that is especially true in times of crisis. But there are some investment strategies that are meant to reduce fluctuations in your overall wealth and bring more stability. In this guide, moneyland.ch explains these investment strategies.
Recessions, inflation, deflation: Economies have gone through many stormy seasons. These crises have a direct impact on investors. Many seek alternatives that offer more stability but still have the potential to deliver investment returns.
There are various investment strategies that aim to provide an optimal balance between returns and risk. In this guide, moneyland.ch lists some of these strategies.
Important: Before you begin investing, you should first build up an emergency fund. That is true no matter which kind of investment portfolio you use. Having an emergency fund ensures that you have immediate access to money in all circumstances, should a financial emergency arise. You can find useful information in the guide to emergency funds.
1. 70-30 portfolio
For a long time, the 70-30 portfolio was considered the benchmark for a balanced investment portfolio. However, its significance has waned somewhat in recent years. A 70-30 portfolio is made up of 70 percent stocks from industrialized countries and 30 stocks from developing countries (emerging markets). Affordable exchange-traded funds (ETFs) that replicate global indexes are an ideal solution for creating this kind of portfolio. You can find detailed information in the guide to 70-30 investment portfolios.
Advantages: The relatively large emerging market component can help to compensate for the disproportionate presence of industrialized countries – particularly the United States – in global stock indexes.
Disadvantages: While a 70-30 stock portfolio is broadly diversified in terms of stocks, it does not include any other asset classes like bonds or fiat currency (money market funds, for example).
2. 60-40 portfolio
A 60-40 portfolio is comprised of 60 percent stocks and 40 percent bonds. It is meant to combine relatively-high return potential with a relatively-low risk of loss. The logic behind this strategy is that when the value of stocks goes down, the value of bonds should normally go up. You can easily put together a 60-40 portfolio using one diversified stock ETF and another diversified bond ETF. Alternatively, you can also use just one fund of funds that provides a complete 60-40 portfolio. You can find more information in the detailed moneyland.ch guide to 60-40 portfolios.
Advantages: The relatively large bond component can help to balance out the risks associated with the stock market. Bonds are less likely to experience strong fluctuations.
Disadvantages: In recent years, bonds have rarely delivered positive returns. The concept that stock and bond markets always balance each other out – and thus balance your portfolio – is also not always accurate. In 2022, for example, both stocks and bonds lost value, with a few exceptions.
A long-term investment horizon is essential
The investment strategies shown here are meant to provide stability. But they are not immune to major short-term fluctuations. In addition to diversification, holding onto your investments for a long period of time is also key. Ideally, you should leave your money invested for at least 10 years – especially if you use a portfolio with a large stock component.
Important: If your portfolio ever loses value compared to the amount you invested, do not immediately sell your investments. It is generally better to remain calm and simply hold onto your investments until they recover.
3. Cockroach portfolio
A cockroach portfolio consists of one-quarter each of stocks, gold, government bonds, and fiat currencies (bank account balances or money market funds, for example). Like cockroaches, this kind of portfolio is meant to be very resilient. The concept was largely popularized by financial expert Dylan Grice.
The stock component, which should ideally be broadly diversified, has the potential to deliver high returns. The government bond and gold components serve to hedge against stock market fluctuations. The cash component provides liquidity, though it does not replace the need for an emergency fund. You can find more information in the specialized guide on the cockroach portfolio.
Advantages: A cockroach portfolio, with its four different asset classes, is particularly well-diversified. This makes it resistant to many kinds of crises, and tends to reduce volatility.
Disadvantages: Historically, stocks have proven to be the return-generating workhorse of investment portfolios. In a cockroach portfolio, the stock component is very small. So the greater stability comes at the expense of potential returns. Additionally, the quartering into four different asset classes demands frequent rebalancing.
4. All-weather portfolio
The all-weather portfolio, which was popularized by well-known investor Ray Dalio, is meant to equip investors against all market conditions and cycles. This portfolio is comprised of 55 percent mid- and short-term US government bonds, 30 percent stocks (primarily US stocks), 7.5 percent of gold, and 7.5 percent of other commodities.
This strategy is geared towards US investors, and has a strong US focus to match. But it can be applied internationally as well.
Advantages: The different asset classes provide broad diversification. This can potentially reduce volatility, resulting in softer fluctuations in the value of your portfolio.
Disadvantages: The all-weather portfolio is very US-centric, which creates a geographic concentration risk. The very large bond component is also noteworthy, as bonds have consistently delivered very poor performance. Additionally, because of the many different components, this portfolio required frequent rebalancing, which can be costly in terms of time and investment fees.
Use an affordable stockbroker
High investment costs detract from returns. That makes it very important to use an affordable stockbroker. Brokerage and custody fees vary broadly between stockbrokers. You can compare the stock brokerage offers from Swiss banks using the online trading comparison on moneyland.ch.
There is also the option of using a neobank that offers investment services. These neobanks have relatively low fees for small investors, but only offer a limited selection of investment vehicles.
Note: This article is provided for informational purposes only, and should not be seen as investment advice. The publisher does not accept any liability in connection with this publication.
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