While you would be excited to enter 2023 with joy and would have your new resolution list ready, make sure that your focus is not limited. It is crucial that you also add one of the most important aspects of your life–your investments and financial goals to your resolution list.
With the current trajectory of interest rate hikes and predictions of a global recession, 2023 will certainly prove critical for your investment portfolio. Thus, you must undertake measures to look after your financial goals and build a well-balanced portfolio with an efficient asset allocation strategy. Here is how and why you should consider this aspect as you enter the new year.
Why do you need to relook at your asset allocation strategy?
Two factors impact your portfolio allocation i) your investment goals & life stage ii) the existing market condition. Both these factors have a direct impact on your portfolio. While considering the investment goals and life stage, you can shift the weight of your asset allocation with no hassle, it is the latter that is expected to have a huge impact on your portfolio in 2023.
The global market condition from equity to commodity is quite volatile at the moment. While you may not have invested in global equities or commodities, they still have an impact on your overall portfolio as Indian markets also reflect global market fluctuations.
For 2023, US equities and commodity asset classes have a relatively favourable outlook. US equities have already corrected by 19.7% in the S&P 500 and 32.2% in the NASDAQ-100 this year in advance of a possible recession. This could result in a soft landing for the US market and may reflect a positive change for Indian investors.
Moreover, commodities, specifically gold, have corrected by 13% in 2022. With a likely dollar turnaround, a moderate-to-positive outcome for commodities can be expected in the coming year. However, financial markets are likely going to be volatile.
Your current portfolio asset allocation may not be versed with the economic and financial shifts expected for the year 2023. Thus, it is crucial that you adopt an asset allocation strategy that can ensure stable returns for you while reducing the downside risk.
Which asset allocation strategy should you choose?
Since interest rates have risen and bond yields are high, it is a good time to take exposure to medium-duration funds. An asset allocation with decent exposure to debt will ensure that the downside is protected. You should ensure that the asset allocation strategy of your portfolio matches the risk with risk-mitigation measures in place.
For the most part, domestic long-duration debt and Indian equity do well together. However, given the macroeconomic outlook of a relatively uncontrolled global inflation and passthrough of that to India, a combination of low to medium duration/accrual strategies in debt and Indian equity is recommended. Any possible benefit of interest rates moving down will be reflected in Indian equity. The rate cuts will also result in higher prices of the bonds.
Based on your investment goals, you should consult a financial expert and undertake asset allocation for your portfolio. Remember that with the unfavourable geo-political situation at present and the dismal global growth outlook, some predictions may come true, and some may not. As long as you have taken care of your next 2 years’ liquidity requirements and have a long-term outlook, the volatility in 2023 will not compromise your goals.
The best way to protect your investment from the downside risk is to evaluate your current position and make changes to your asset allocation keeping your long-term goals in perspective. While the mentioned strategy may help you navigate through the coming year, you should evaluate your investment goals and preferences before making a decision as there is no one size that fits all.
(By Anup Bansal, Chief Business Officer, Scripbox. Views expressed above are personal)