You’d be happy to step into 2023 with glee and your new resolutions list ready, but make sure your focus isn’t limited. It’s crucial that you also add one of the most important aspects of your life to your solution list – your investments and financial goals.
With the current trajectory of interest rate hikes and forecasts of a global recession, 2023 is sure to prove pivotal for your investment portfolio. Therefore, you need to take action to pursue your financial goals and build a balanced portfolio with an efficient asset allocation strategy. Here’s how and why you should consider this aspect at the start of the new year.
Why do you need to rethink your asset allocation strategy?
Two factors affect your portfolio allocation i) your investment goals and life stage ii) existing market conditions. Both factors have a direct impact on your portfolio. With investment goals and life stage in mind, you can easily shift the weighting of your asset allocation, with the latter expected to have a major impact on your portfolio in 2023.
From equities to commodities, global market conditions are quite volatile right now. While you may not have invested in global equities or commodities, these will still affect your overall portfolio as Indian markets also reflect global market fluctuations.
For 2023, US equities and commodity asset classes have a relatively benign outlook. US stocks have already corrected 19.7% in the S&P 500 and 32.2% in the NASDAQ-100 this year ahead of a potential recession. This could result in a soft landing for the US market and reflect a positive shift for Indian investors.
Additionally, commodities, notably gold, have corrected by 13% in 2022. With a likely turnaround in the dollar, expect a modest to positive outturn for commodities in the coming year. However, the financial markets are likely to be volatile.
Your current portfolio asset allocation may not be familiar with the economic and financial changes anticipated for 2023. Therefore, it is crucial that you follow an asset allocation strategy that can secure you stable returns while reducing the risk of loss.
Which asset allocation strategy should you choose?
With interest rates up and bond yields high, it’s a good time to get exposure to medium-duration funds. An asset allocation with appropriate debt exposure ensures that the downside is protected. You should ensure that your portfolio’s asset allocation strategy is commensurate with risk and that risk mitigation measures are in place.
Domestic long-term debt and Indian equity mostly do well together. However, given the macroeconomic prospects of relatively uncontrolled global inflation and its spillover to India, a combination of low to mid duration/growth strategies in bonds and Indian equities is recommended. Any potential benefit from falling interest rates will be reflected in Indian equities. The interest rate cuts will also lead to higher bond prices.
Based on your investment goals, you should consult a financial professional and make an asset allocation for your portfolio. Keep in mind that given the current unfavorable geopolitical situation and bleak global growth outlook, some predictions may come true and others may not. As long as you have taken care of the liquidity needs for the next 2 years and take a long-term view, the volatility in 2023 will not affect your goals.
The best way to protect your investment from downside risk is to assess your current position and make changes to your asset allocation while keeping your long-term goals in mind. While the strategy mentioned can help you navigate through the year ahead, you should assess your investment goals and preferences before making a decision as there is no one size fits all.
(By Anup Bansal, Chief Business Officer, Scripbox. The views expressed above are personal.)
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