The 2020s is shaping to be a risky bunch of years. Risk in a good (and bad) way. But obvs, it’s the bad risks that gobble up most of our attention. And for good reason. Which is why forecasting those tail risks are a waste of time. So do this instead.

While you can’t time anything (or predict the future with any meaningful certainty) you’re better off figuring out the risks we’ve got going on now and doing your best to shelter your portfolio should they blow up.

OK, here goes.

#1 Geopolitical tensions

From the war in Ukraine to the war in Israel which has seen retaliatory measures from Iran that rattled markets we’ve seen our fair share of wars. I mean 2 wars in under 5yrs is nuts.

The reason investors get so freaked out by such conflict (and rightly so!) is because it can literally mess up global trade + supply chains. Like c’mon – give us a break. Covid-induced supply chain bottlenecks were bad enough. 

And the key resource that gets most impacted is oil. Investor sentiment usually moves inversely to oil prices during regional (or even global) conflict! So as oil prices go up, investor confidence goes down. Investor sentiment is a key ingredient in functioning markets.

It affects how much risk they’re willing to take which has massive knock-on impacts. Risk-taking is the backbone of markets. Investors take risk they believe they’ll be (over) compensated for – otherwise they could literally stick their dosh in a money market fund. Or cash. But they believe the markets offer attractive risk/reward dynamics over the long term.

But geopolitics can spin it around and make investors paranoid. Worried that regional conflict could spill into something way more sinister. Something tells me the next decade of investing might require a lot more courage than you think…

So it’s no surprise stocks fall on this sort of news. Over the short term, it feels way bigger but if you zoom out you’ll find that geopolitical conflict (like a war) eventually gets sorted out.

I say eventually because it really can take a while but the overreaction to geopolitics is totally understandable. So unless we get nuked, you really don’t need to worry. Long term, stocks are safe. 

The 3 assets I can think of that act as protection for this sort of thing:

1. Gold 
2. Bitcoin 
3. Oil 

Gold is a global safe haven asset. It’s where investors flee when all hell breaks loose and uncertainty is sky high. Its use is in being a safe haven asset and Bitcoin (since it’s not widely adopted) will not be seen as the classic ‘flight to safety’ since most people don’t view it as ‘safe’. Not yet anyway!

But Bitcion will eventually be viewed as that safe asset and so over the long term I believe it’ll protect your money from almost anything.

And the cool this is is that it’s not controlled by any gov/single entity. No one can fiddle around with it supply and its digital scarcity makes it a great inflation hedge. Over time.

And why oil? Since this is the asset most likely to be affected (and rise in price) due to conflict, it can’t hurt to own some! And during inflationary times, it’s a great source of inflation protection. Not to mention we still need oil for absolutely everything. Make of that what you will! 

#2 Economic slowdown 

We’ve enjoyed a great run of things since the March 2020 crash. Scratch that – an amazing run of things! Unusually amazing.

In response to the pandemic lockdowns, govs flooded the system with liquidity via QE and through slashing the cost of money via rick-bottom interest rates. It’s no surprise economies started to get back on their feet. And fast.

Investors were also more than happy to fund all sorts of companies (esp those loss-making ones) since there wasn’t much standing in the way of opportunity costs.

Now, after inflation crept out the bag central bankers started to hike interest rates and slowly start squeezing some of that excess out the system (but this is the bizarre reason we’ve had no recession yet).

Monetarists would tell you it was obvious.

More money chasing too few goods = inflation. 

But busts follow booms and booms follow busts. Economies work in cycles. So you must never expect periods of strong growth to last forever. Or periods of weak growth to last forever either. But tight monetary policy is usually a start for slowing things down. After all, isn’t that the whole point?

But since the US gov has been running fiscal deficits, they’re effectively still stimulating the economy. Which helps to explain the bizarre reason we’ve had no recession (yet).

No idea what will cause the slowdown or if that comes from a global one or a regional one – it almost always catches investors off-guard.

Slowdowns are nasty since we spend less and so drive corporate profits down while investor activity pretty much dries up. 

When it comes to preparing your portfolio for any coming slowdown, here are some things to think about:

-Look for things that we all need (and will buy) no matter that’s going on in the economy and what rich people spend on. These 2 areas are usually pretty robust and tend to hold up well.

Though I bet you’re gonna tell me that – hey, luxury goods companies are being totally hammered right now. LVMH is up 11% this year while Hermes is up 22%. Luxury goods biz are strong. Sure, their sales have fallen (thanks to Chinese consumers tightening their belts) but they’ve held up pretty well. 

-DCA and don’t try to be smart via market-timing! We can’t predict when slowdowns will happen (not with 100% accuracy) and when markets will begin to price this in. We (along with the Fed) are guided by data which a) by definition means it has already happened and b) trends can take time to work their way through the system. So you’re kinda chasing your tail a little bit. 

Instead, keep drip-feeding your money into the market to wipe out your anxiety! The smarter you are the more likely you’ll wanna time stuff. You’ll have your fancy models and the way in which you think the world will play out.

Don’t get caught out. The world is a funny place and will surprise you in ways you cannot predict. Stay humble. 

#3 Shifts in monetary policy

Any sudden changes in central bank policy – like interest rate hikes or unexpected tightening measures (like QT) can rattle markets causing a sell-off. We’ve seen the Fed flip-flopping from rate cuts to no rate cuts to talking about potential rate hikes!! We had 6 rate cuts priced in but that’s all but vanished now 

Make sure your portfolio is protected – by that I mean it’s exposed to a range of outcomes. I.e if rates get tighter you’ll want greater exposure to commodities / financials but if rates are lower you’ll wanna beef up on growth stocks.

But no one knows the future so own a bit of everything. The exact % will differ simply down to personal circumstances and risk appetite! 

Have exposure to different countries. Let’s compare China vs US. The US is in a tightening monetary policy regime because the economy is not cooling down (aka prices are still rising more by than 2%) but in China you have the total reverse where they’re actually facing deflation (so falling prices) due to sluggish consumer confidence.

So the 2 countries are on wildly different interest rates trajectories. One more reason why diversification among counties is so critical. 

And lastly – don’t fight the Fed! 

The point is, there will always be risks facing markets. No risk = no reward. But sometimes the risks get so big that they scare us out the markets. Do not let them bully you. You gotta be in it to win it. And stretch your time horizon out. Way out. That way you give yourself the best shot at success.

Everything also always feel unprecedented till you turn to history. Things always feel worse in the moment. And all risks seem like the biggest opportunity in hindsight. Course, hindsight cheated. And we can’t. 

So zoom out. And tune out. The news / media is not a great place for optimistic thoughts! And you gotta stay optimistic believing our future will be better than ever imagined otherwide why would you wanna invest.

If the media’s got to you – you gotta build your resilience by doubling-down on your patience & conviction.

And treat sell-offs as buying opportunities. That’s how to make real money. When others sell irrationally. 

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.