Fluctuating energy prices, high inflation and falling purchasing power: life is not only becoming more expensive, investing yourself with the aim of protecting your savings is more complex than ever. Jürgen Hanssens, consultant at KPMG Deal Advisory and PhD in applied economics, collected in his book Investing in Turbulent Times numerous do’s and don’ts on this topical theme. Discover a handful of insights: “Keep a cool head when the markets storm.”
1. Create an investment portfolio with different components
“People are sometimes pushed too quickly towards equities. They would yield the highest return in the long term. But not everyone has a long time horizon,” he says. “Young investors often think they still have time to recover from stock market crashes, but they shouldn’t forget that they may want to buy a house or apartment in a few years. An ideal portfolio therefore, in my view, consists of various investment instruments, with a view to fulfilling three needs. 1) By creating a cash buffer you can respond to new opportunities and deal with unexpected or difficult circumstances. 2) With defensive investment products, such as (government) bonds, term deposits and gold, you can protect your financial ‘health’. 3) Riskier asset classes such as equities can be useful, especially for pursuing your long-term financial goals.”
2. Avoid companies with a lot of debt and choose companies with a reinforced concrete balance sheet
For shares, Jürgen Hanssens prefers a certain type of company. “Companies that mainly want to grow invest continuously and take on debt to do so. Too little attention is paid to the associated debt risks, while the positive elements of a strong cash position are often underexposed,” it sounds. “Cash enables a company to respond to various opportunities. That is why I prefer to opt for companies with a solid cash position than for companies with a lot of debt. Compare it to the emotional bank account, a concept by Stephen Covey: deposits you make have a positive effect, while withdrawals have a negative effect. Those who have more withdrawals than deposits are negative. People who consistently make more withdrawals than deposits are indebted to others, and will eventually see their relationships with those parties deteriorate. Such situations are to be avoided.”
3. Focus on dividend stocks, but also monitor the sustainability of that dividend
The dividend is another important asset to keep an eye on, but not all dividends are the same. “When stock prices fall, the potential dividend yield can seem very attractive. But investors should not be blinded by this”, is the advice. “A company is not obliged to pay a dividend. When the economy takes a turn for the worse and corporate profits come under pressure, companies often cut or even cut dividends. If a stock’s potential dividend yield seems very high, you should also check the company’s dividend payout ratio. This indicates the percentage of earnings per share paid out as dividend. The lower the ratio, the higher the potential net profit relative to the total dividend payout, and the safer the dividend over the long term. When this ratio approaches 100 percent, you can assume that market turmoil will hit shareholders quickly. When selecting dividend stocks, it is best to look for stocks of companies that have been keeping or increasing their dividends continuously for years, the so-called dividend aristocrats.”
4. Use ETFs to invest passively but avoid themed ETFs
“An exchange-traded fund, also known as a tracker, is a passively managed and usually highly diversified investment fund,” explains Jürgen Hanssens. “The purpose of an ETF is to track an underlying stock market index as closely as possible. But in recent years, many thematic ETFs have also emerged: they invest in a specific niche or market segment, such as robotics or sustainability solutions. These types of ETFs tend to be riskier. Some are speculative in nature, where you run the risk of investing in a bubble or overvalued hype. Moreover, the annual costs of such ETFs are often much higher than simple trackers on broad indexes.”
5. Watch out for the home bias in turbulent times
Home bias stands for home market preference. But staying under the church tower is not always the best choice as an investor. “That pitfall is that you tend to place too much weight in your portfolio on investments from the home market. The academic literature explains this home bias by the fact that investors are generally more confident and optimistic about investments that come from their own home market. This is partly because investors have access to more and more qualitative information about investments close to home. But to build a well-diversified investment portfolio, it’s important to include different geographies and sectors in your portfolio. By investing on a global scale, you ensure that your portfolio is much better diversified. As a result, you can be less affected by local or sectoral crises.”
6. Limit the damage instead of doing nothing at all
Furthermore, savers must unlearn their masochistic traits. “The still high inflation today evaporates the purchasing power of your savings at a frightening rate. Yet Belgians remain champions in parking their money in a savings account.” There are valid alternatives for that, it sounds. “It is easy to achieve a potentially higher return on the basis of, for example, term accounts, government bonds and money market funds. With such defensive financial products you will not be able to beat inflation, but you can still somewhat limit the damage, ie the loss of purchasing power, without taking much risk. The e-DEPO account is also an interesting alternative to a savings account. Although the government recently introduced a maximum gross interest rate of 2.50 percent, today a deposit account with the federal government often still yields a higher return than many savings accounts.”
7. Attune your investment portfolio one hundred percent to your personal profile
“It’s less obvious than you think – but absolutely crucial,” says de Hanssens. “Before you start investing, it is best to ask yourself questions. How well can I handle risk? This measures your risk capacity. And two: how much risk do I want to take? This is how you map out your risk appetite or risk tolerance. As an investor, you should make sure that there is no conflict between how much risk you want to take and how much you are able to handle risk. By matching your risk capacity and risk appetite, you can avoid unnecessary headaches and sleepless nights. Good lucke!
2023-07-22 07:03:48
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