Diversifying Investments in Times of Turmoil: A Comprehensive Guide

With recent turbulent changes on the world stage, it is difficult to predict what may happen. Conflict in the Middle East continues to escalate, while the Horn of Africa faces severe humanitarian crises. The resurgence of left-wing politics in Latin America is met with right-wing opposition, and economic and security challenges in Asia present a shifting landscape. The ongoing conflict between Russia and Ukraine remains unresolved, and global trade is facing headwinds with high inflation and supply chain disruptions.

For investors, the growing volatility highlights the need to pursue a secure investment portfolio over the long term. This article will therefore explore asset allocation strategies to address these challenges.

As individuals, our wealth is like a small boat, and investing heavily in assets in a single region may carry significant risks. Furthermore, history has shown us the rise and fall of several empires and the transformation of global trade networks.

For instance, Spain once became a wealthy empire through the extraction of gold and silver from the New World, but its economic power was gradually overtaken by the Netherlands, which established itself as a maritime powerhouse through strong shipping capabilities and financial innovation.

The UK, through the industrial revolution and global colonial expansion, built a vast empire and became known as the "empire on which the sun never sets".

In the late 19th and early 20th centuries, the US grew into a global economic superpower.

These changes indicate that global wealth and economic growth drivers shift among different countries and regions. Investors who adjust their asset allocation in a timely manner and follow the shift of economic gravity can capture emerging growth opportunities and avoid over-reliance on a single country or region. Otherwise, the decline of a single region will have a long-term negative impact on individual wealth.

As the legendary investor Warren Buffet has repeatedly emphasized, "I think that the best investment you can make is an S&P 500 index fund." The S&P 500 has performed remarkably well in countless times of turbulence and change, and according to statistics, the S&P 500 has been profitable every 20 years in history. Its 20-year average minimum return rate is 5.62%, and its 25-year average minimum return rate is 9.07%. As the investment time extends, the actual rate of return will be closer to the average. From January 1928 to December 2023, there were a total of 1,152 months, and it achieved positive returns in 682 of those months.

Investing in the S&P 500 can greatly minimize various market risks for investors, and this passive investment is very suitable for ordinary people. It not only saves time researching individual stocks but also helps investors to sustain profitability. Well-known S&P 500 ETFs in the US market include:

One of the first and most well-known S&P 500 index ETFs in the market is the SPDR S&P 500 ETF Trust (SPY). Managed by State Street Global Advisors, it was launched in 1993 and is not only one of the largest exchange-traded funds in the world but also a widely used investment tool for US large-cap stocks among investors. SPY has extremely high liquidity, with massive daily trading volume, making it easy for investors to buy or sell, and the bid-ask spread is usually small, which is particularly advantageous for large-scale traders.

IVV is an ETF issued by iShares, a subsidiary of BlackRock, also aiming to track the performance of the S&P 500 index. IVV has a lower expense ratio than SPY, at around 0.03%. Although IVV's liquidity is not as high as SPY, its daily trading volume is still sufficient to meet the normal trading needs of most investors.

In addition to investing in S&P 500 ETFs, high dividend yield strategies are also the best way to achieve stable returns in a turbulent macro environment, especially in a high-interest-rate backdrop. If investors want to pursue higher dividend returns, they can also pay attention to the following ETFs:

This ETF tracks the Dow Jones U.S. Dividend 100 Index, which consists of companies that have paid dividends for at least ten consecutive years and have high dividend quality scores based on factors such as yield growth and return on equity. This means that SCHD invests in some of the most profitable and stable dividend payers in the market, such as Home Depot, Johnson & Johnson, and Microsoft. This ETF has a dividend yield of 3.52% and assets under management of $53.65 billion, making it an excellent choice for investors seeking stable and growing dividend income.

This is a Covered Call ETF issued by J.P. Morgan. Unlike traditional ETFs, Covered Call ETFs sell call options on the underlying basket of stocks to earn option premiums in addition to the returns from holding the stocks that correspond to the index they track. This investment approach is suitable for assets that maintain a stable growth rate, as holders of the ETF can receive option premiums in addition to the returns from holding the stocks.

JEPI tracks companies in the S&P 500 and aims to provide monthly distributable income and equity market exposure with lower volatility by generating additional income from selling call options. According to data provided by J.P. Morgan, this ETF:

- Provides an attractive 12-month rolling dividend yield of 8.50% and a 30-day total return of 7.04%.

- Ranks in the top third in terms of return among products in the same category.

- Has a competitive price compared to its peers, with a management fee of only 0.35%.

There is a saying that goes, "buy gold in times of chaos." As a traditional safe haven asset, gold is often sought after in times of financial market turmoil, currency devaluation, and increasing inflation. Its non-credit nature makes it independent of the financial system and provides a way to hedge against risks. In addition, gold has repeatedly proven its ability to preserve value during times of crisis throughout history.

Looking at the current world economic and political landscape, both geopolitical tensions and the massive monetary easing actions by global central banks have become catalysts for the soaring gold prices since the beginning of the year.

ETFs provide investors with the opportunity to participate in the gold market without directly holding physical gold. Gold ETFs have gradually become important tools for investors to allocate gold assets due to their high transparency, strong liquidity, and easy operation. There are currently many mature gold ETF products available in the Hong Kong and US stock markets, such as:

This is the world's largest gold ETF, providing investors with the opportunity to track the spot price of gold.

This is a gold ETF listed on the Hong Kong Stock Exchange. It is a sister fund to GLD on the US stock market and aims to track the price of gold.

Meanwhile, commodities such as crude oil are also worth paying attention to. Energy prices may rise due to supply disruptions, increased transportation risks, or changes in demand expectations caused by geopolitical tensions, such as the recent escalation of conflict in the Middle East that may lead to an increase in crude oil prices. As an important component of the commodity class, there are also some crude oil ETF products available in the market:

The United States Oil Fund (USO) is an ETF that tracks the price of WTI crude oil. The ETF tracks the volatility of WTI crude oil prices by investing in crude oil futures contracts. One advantage of USO is that it allows investors to participate in the oil market at a relatively low cost without directly purchasing crude oil. In addition, USO is a highly liquid ETF, making it easy to buy and sell. However, USO has some disadvantages, such as rolling costs due to rolling futures contracts and market risks.

ProShares UltraShort Bloomberg Crude Oil (SCO) is an ETF that is designed to provide a reverse investment in WTI crude oil prices, making it a bearish ETF. The ETF achieves its goal by investing in oil price futures and other derivatives. One advantage of SCO is that it can provide protection against falling oil prices, making it an investment tool in the bearish market of the oil market. However, SCO also has high risks associated with short-term trading and speculation.

The two crude oil ETFs mentioned above correspond to positive and negative investments in crude oil prices, respectively. Investors can carefully choose based on the economic and political situation and market expectations regarding price changes.

At a time point such as 2024, the market is facing turmoil caused by factors such as expectations of economic recession, geopolitical conflicts, and increased financial system risks. For investors who value asset safety and liquidity, increasing allocation to high-quality sovereign bonds such as high credit-rated national bonds is also a good choice. At present, the Fed is expected to maintain high interest rates, which may exceed market expectations. In this case, high-yield assets such as national bonds become the object of pursuit for investors.

US Treasury bonds are considered the safest bonds in the world because the United States is the world's largest economy, and unless the US government goes bankrupt, US Treasury bonds are generally considered "absolutely default-free" bonds. US Treasury bonds can be divided into short-term bonds (1-3 years), medium-term bonds (4-10 years), and long-term bonds (10 years and above) according to their maturity. The longer the bond, the more sensitive it is to interest rate changes, and the theoretical yield will be higher; the shorter the bond, the lower the yield will be.

Therefore, investing in US Treasury bond ETFs can not only obtain stable dividend returns close to risk-free interest rates but also obtain higher yields when interest rates decline.

Here are three US Treasury bond ETFs categorized by time limit, which are recommended for beginners to start with:

TLT became the most popular US stock ETF among investors in 2023, with many investors participating in US Treasury bond investment through this ETF product.

And in response to the current situation where there is no sign of improvement in inflation, there is also a special type of ETF in the US stock market for investors to choose to reduce the losses caused by inflation - inflation-protected bonds, also known as TIPS, which are a special type of US Treasury bond, and both principal and interest are adjusted based on the inflation rate.

The principal value of TIPS is adjusted based on the inflation rate, and the principal value changes based on the Consumer Price Index (the standard indicator that measures inflation). This means that if the inflation rate rises, the principal value of the bond will also rise, and vice versa. In addition, the interest on the bond is also adjusted based on the inflation rate. This ensures that investors can ensure that the value of their investments is not affected by inflation.

The yield on TIPS is usually lower than that of ordinary bonds because they provide additional protection. However, if the inflation rate rises, the yield on TIPS will also rise, which means that investors can obtain higher returns. Below we recommend the best performing TIPS ETF product:

STIP aims to track the Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index, which consists of TIPS with a remaining maturity of less than five years. The ETF provides investors with short-term TIPS exposure. The shorter maturity of these securities means that investors face lower risk, but also lower yields compared to long-term securities. The fund allocates approximately 38.0% of total assets to TIPS with a remaining maturity between 3-5 years. The next largest investment allocation of approximately 22.5% is towards TIPS with a remaining maturity between 2-3 years.

As the name suggests, "safe-haven currencies" refer to the effect of avoiding market risks by holding sovereign currencies with optimal liquidity. When the market is in panic and turmoil, these currencies are often seen as safe havens due to the stability of their national economies, strong financial systems, and important roles in international trade. Among them, the most stable and reassuring currency is the US dollar. The safe-haven property of the US dollar stems from its strong fundamental support, including but not limited to the United States' powerful economic strength, sound financial market system, highly liquid bond market, and core pricing position in global commodity trading. Especially when market risk aversion is high and uncertainty factors surge, the US dollar often exhibits excellent attractiveness, attracting global capital inflows and highlighting its crucial role as a safe-haven asset.

Below, we introduce a USD-anchored ETF product:

This ETF aims to track and provide returns based on the performance of the US Dollar Index, primarily through futures contracts and other derivative instruments to invest in the value changes of the US dollar relative to a basket of major international currencies. The US Dollar Index measures the comprehensive value of the US dollar relative to the currencies of several major trading partner countries worldwide. It typically includes currencies such as the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. UUP, as a financial instrument, allows investors to indirectly participate in the investment of the US dollar's relative trend against these currencies without directly trading in the foreign exchange market. As it was designed to reflect the exposure to the strength of the US dollar, theoretically, the value of UUP should rise when the US dollar appreciates against other currencies; conversely, if the US dollar depreciates, the value of UUP may decline.

In the face of future uncertainty and market volatility, the core value of diversified investments lies in their long-term stability and resilience. It requires investors to have patience and foresight, not be swayed by short-term fluctuations, and adhere to investment principles to continuously optimize and balance investment portfolios.

In today's world of globalization and digitization, each of us as investors should assess the situation and use diversified strategies to build a strong investment moat for ourselves. Although we cannot predict every fluctuation in the market, by scientifically and reasonably diversifying our investments and utilizing various investment tools, we can steer through turbulent situations and even hope to achieve stable and sustainable investment returns after the storm.