Investors who want to position themselves in order to obtain the best risk-return in this time of market turbulence in the face of coronavirus should diversify, according to the head of Investments at Transfero Swiss, Carlos Russo. A good diversification strategy is to have a mix between short-term government bonds tied to inflation, post-fixed bonds of immediate liquidity, shares of companies with low debt/profit ratios and that can pass on price increases of their products to customers and scarce goods such as gold, silver and crypto.
He points out that Ray Dalio, one of the world’s largest hedge fund managers, argues that a well-diversified portfolio can achieve the best possible risk-return ratio. For the average investor, “return” means the average return he can expect for that asset class or a specific asset in the coming years, and “risk” can be understood as the maximum loss he would be willing to suffer in a non-catastrophic scenario.
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By diversifying between assets and asset classes, including crypto, it is possible to extract the expected return of these assets independently while creating a protective layer derived from the effect of diversification – a phenomenon studied by the Nobel Prize winner Harry Markowitz. This protective layer against risk arising from the diversification of investments can be understood in a simplified way: the investor who invests in two unrelated investments (A and B) benefits from the fact that, although A has fallen, B can stable or climbed.
A practical example: the investor who owned, earlier this year, 50% of the equity on the Ibovespa and 50% in bitcoin, would have seen his equity in shares depreciate around 40%,while his equity in bitcoin would have risen around 15%. On average, his portfolio would have fallen just over 20%, far less than the 40% he would have lost by investing only in the stock market. It is interesting to note that none of this changes the outlook of both investments in the long term, but it helps to smooth out short-term losses. That is, a well diversified portfolio has a better risk-return relationship and this is the idea behind the 1990 Nobel Prize in Economics (modern portfolio theory).
Ray Dalio applies the assumptions of this theory to an extremely diverse portfolio, called “All Weather Portfolio”, so as to be as efficient as possible in terms of risk-return in the long run.
Regarding which assets to place in this diversified wallet and the proportion of each of them, there is no simple answer. From a personal point of view, according to Carlos Russo – making it clear that it is not an investment recommendation – the division today should be as follows:
- Short-term government bonds linked to inflation (15%)
- Post-fixed securities of immediate liquidity (15%)
- Shares of companies (50%)
- Gold (15%)
- Cryptocurrencies (5%)