Why staying invested calls for more than stocks and bonds

FOR decades, investors have relied on a familiar formula for portfolio diversification: stocks for growth, bonds for stability.

This balancing act lies at the heart of the traditional 60/40 portfolio, a time-tested allocation of 60 per cent to equities and 40 per cent to bonds. That asset mix has guided generations of investors through the ebb and flow of markets.

But recent market disruptions have exposed the limits of this longstanding approach.

In 2022, surging inflation and aggressive monetary tightening sent equities and bonds into a rare simultaneous decline.

Most recently in October, the sharp sell-off in US technology stocks – with some US$1.6 trillion wiped off semiconductor stocks within just six days – underscored how quickly market sentiment can turn, even against a backdrop of powerful structural growth trends.

For long-term investors, the challenge is therefore not merely one of balancing growth and stability. It is about building portfolios with the resilience to weather inevitable bouts of volatility.

After all, the ability to stay invested through market turbulence is often just as important as identifying the opportunities that lie ahead.

Increasingly, that means looking beyond traditional asset classes to diversify not just investments, but also the underlying sources of risk and return.

This is where alternative investments – such as gold, private assets and hedge funds – can play an important role.

Their appeal lies not in replacing traditional assets or eliminating market fluctuations, but in introducing different sources of risk and return that can strengthen a portfolio’s resilience.

Considering alternatives

Gold, for instance, has long occupied a unique place in investors’ portfolios. It often comes back into focus when confidence in financial markets is tested. Its appeal rests not on earnings or income generation, but on its ability to preserve value during periods of economic, geopolitical and monetary uncertainty.

That role has been easy to overlook this year. Admittedly, oil-driven inflation, shifts in interest-rate expectations and high bond yields have weighed on sentiment, leaving the precious metal among the laggards. Yet, there are signs that the worst may now be behind it.

Demand, particularly from Asia, has remained resilient, while efforts to rein in speculative retail trading have helped improve market discipline. At the same time, rising long-end government bond yields suggest renewed concerns over fiscal sustainability, reinforcing gold’s appeal as a hedge against monetary debasement.

Against a backdrop of geopolitical fragmentation, fiscal profligacy and monetary uncertainty, gold retains an important place in investors’ toolkit. While it is not a perfect insurance against every market shock, it is a store of value and source of diversification.

Hedge funds, too, are finding renewed relevance.

The asset class fell out of favour during much of the decade following the 2008 Global Financial Crisis, when ultra-low interest rates, abundant liquidity and steadily rising markets rewarded straightforward equity exposure.

But as the era of easy money faded, the market shifted from a rising tide lifting all boats to one marked by wider performance dispersion across sectors and regions.

It is precisely in such environments that many hedge fund strategies tend to come into their own. Their ability to exploit market dislocations, identify relative-value opportunities and position for macroeconomic shifts can provide an important source of diversification when traditional assets come under pressure.

Indeed, some strategies have historically demonstrated their worth during these periods of uncertainty, helping to cushion portfolio drawdowns when conventional stock-and-bond allocations struggled to provide their usual protection.

Private assets – spanning private equity, private credit, infrastructure and real estate – is another area that merits closer attention.

In a world where market narratives can shift overnight, the appeal of investments backed by long-term contractual cash flows becomes increasingly apparent.

Take infrastructure for instance. Whether in the form of power grids, transportation networks or digital infrastructure, these assets provide services that economies continue to depend on regardless of the prevailing market narrative.

Their ability to generate relatively predictable cash flows can offer an important source of stability at a time when investors are seeking greater certainty amid an increasingly uncertain world.

The preference is, of course, for assets where cash flows are already visible, rather than speculative development reliant on permits, construction and future utilisation.

Resilience by design

But identifying promising alternative assets is only one part of the equation. Equally important is how they are combined within a portfolio.

This calls for a more nuanced assessment of risk. Private-market returns, for example, often appear smoother than they truly are due to infrequent valuations. Leverage, illiquidity and downside tail events may also be less apparent in historical data.

That is why portfolio construction should go beyond headline returns and volatility to examine how assets behave during periods of market stress.

Measures such as drawdown risk and conditional value at risk, which focus on losses in the most adverse scenarios rather than average volatility alone, can provide a fuller picture of portfolio resilience.

Diversification, in other words, must extend to the diversifiers themselves. Concentrated exposure to a single manager, strategy or investment vintage can introduce risks that undermine the very resilience investors seek.

A fund-of-funds approach for private markets, for instance, spreads exposure across managers, strategies and vintage years through a single allocation. The result is not only broader diversification, but a reduction in concentration and tail risks that can otherwise arise from highly selective private-market exposures.

Staying the course

Taken together, alternatives broaden a portfolio’s sources of stability and return, reducing reliance on any single market outcome.

This philosophy is also at the heart of our “barbell strategy”, where alternatives complement income-generating assets and long-term growth opportunities, helping portfolios better navigate an increasingly uncertain investment landscape.

To be sure, diversification is hardly a new idea. What distinguishes effective portfolio construction is not simply the breadth of assets held, but an understanding of what drives their returns, how they interact, and how they behave when markets come under pressure.

It is this deeper appreciation of risk, correlation and return drivers that turns diversification from a principle into a genuinely resilient portfolio strategy.

In an era when market leadership can shift with remarkable speed, this resilience may be one of the most valuable assets an investor can hold. It is what enables investors to stay the course – and remain positioned for the opportunities that emerge when the dust settles.

The writer is chief investment officer, DBS Bank.