These strategies aim Optimize the balance between risk reduction and cost. “A wide spectrum of investors, from individuals to large institutions, can use many of these tactics,” they say from Goldman Sachs.
First strategy: commitment to quality
A piece of advice involving buy stocks and bonds from companies with strong balance sheets, consistent earnings and dividends, or those that are less volatile. “While savers were rewarded in the last cycle for buying shares of companies with high growth potential in the future, stocks with proven business models and pricing power that pay dividends can offer some protection in a bear market”, they argue from the North American bank.
This idea also applies to currencies“being the US currency an example of a high-quality asset”, they explain. “The dollar is backed by a central bank that aggressively and credibly fights inflation, making it a reserve currency.” “The dollar has appreciated significantly and we believe that it still has the potential to rise”they add.
Furthermore, they maintain that currently “choosing individual stocks and bonds, rather than replicating an index, is bound to be more valuable to investors in the future”.
Second Strategy: Turn to Hedge Funds
Hedge funds now provide more coverage. “Before, when there was economic stagnation, central banks routinely stepped in to make funding cheaper and easier, driving up asset prices across markets. Now, with an increase in inflation, the opposite is happening: central banks can’t cushion the stock market when it falls. this scenario can be conducive to strategies that hedge funds employ, particularly trend following”, they argue.
Thus, they underline that, “although the general yields of hedge funds lagged behind a simple portfolio of stocks and bonds after the financial crisis of 2008, hedge funds fared better in the early 1990s and into the early 21st century, particularly during bear markets”.
Third Strategy: Dynamic Risk Allocation
Dynamic risk allocation. And, going into more detail, they assure, thirdly, that “the strategies that vary the risk of a portfolio according to market volatilityknown as dynamic risk allocation, can also be an opportunity”. and indicate that some exchange-traded funds (ETFs) follow these strategies dynamic risk.
Fourth Strategy: Incorporate Options
Options Trading. In relation to this point, they comment that options to directly protect portfolios from price declines can incur high costs over time. “The broad movements of the market, known as tail eventsare becoming more common, which makes the options less attractive”.
Even so, they point out that, “in a world with higher inflation, where cycles can shorten and volatility increase, the probability that a hedging option will be profitable is higher, but the benefit could be lower, but that will still make them profitable”.
Fifth strategy: acquire uncorrelated assets
Cross asset strategy. Finally, Goldman Sachs points out that financial markets tend to be more correlated in a bear market in equities and that currencies and commodities tend to have larger price swings during periods of higher inflation, “implying a higher probability of an option payout linked to those assets.” For example, they point out, “call options on the US dollar, which pay if the dollar rises, have also been a useful strategy this year, as have put options on bonds, which pay if fixed income prices decline. they go down”.
And given that central bank actions are now the complete opposite of those of previous years, Goldman Sachs believes that, at the current time, “it may be interesting to sell call options (bets that an asset will increase in price) or buy put options (bets that an asset will drop in price), known as ‘collaring’ strategies”.
“It’s one of those strategies that used to be very popular in the past. And it is that it may be time to go back to the old rules, such as volatility targeting and momentum reversal; performances that worked in the past”, these analysts conclude.