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How To Build a Portfolio for Uncertain Times

“We cannot always predict but we can prepare.”

Market cycles are a fact of life. Completely normal, but impossible to predict when they will happen. There are bullish periods of strong market growth and bearish market downturns. The question is: how should you build your portfolio to prepare for these changes?

For illustration purposes only

Many new investors enter the market during bullish times due to the euphoria that’s created. When this happens, they only know of a market that moves higher and could get caught out during a natural market correction. We all want to make money every year, but we know that’s impossible. Even legendary investors like Warren Buffett have had losing years. The key thing is to ensure that when there are market drawdowns the losses are kept to a minimum and outweighed by the gains made during good times.

We must remember that it is not all about percentages gained; we must also look at the risk taken to achieve those returns and the volatility within the portfolio. This is an area that many retail investors fail to gauge and then in times when the market drops, they have large drawdowns. So how do we achieve the best balance?

Building a well-rounded portfolio

Diversification is key! I have been in the markets for nearly 10 years now and the main thing I have learned from my mentors along the way is that good diversification is essential for long-term consistency.

When diversifying, it’s not about buying lots of different stocks, but also spreading yourself among different asset classes. History shows that in different economic conditions, certain assets perform better than others. This graph illustrates the four main conditions and how each asset performs during those times.

For illustration purposes only

When done correctly, we can invest in assets that give us exposure to each condition. This is what’s known as an all-weather or all season’s portfolio. This concept was made famous by legendary investor Ray Dalio in the late 1990s. Dalio built Bridgewater Associates which grew to become the largest hedge fund in the world. He pointed out that when you weight the portfolio based on the volatility of each asset, this gives you incredible consistency to outperform the market on a risk-adjusted basis while having minimal draw-downs. For example, equities are typically around two and a half times more volatile than bonds, so you should have a smaller portion of your portfolio allocated to equities than you do to bonds.

Asset Allocation

In the image below, I have put together an example of an all-weather portfolio along with the performance statistics. This portfolio is structured as an ETF selection that gives exposure to different asset classes in a low-cost manner.

For illustration purposes only

Past performance is not an indication of future results.

Since 2005, this portfolio has only had two losing years with minor losses, and a stand-out performance in 2008 returning +6.07% during the financial crash. The portfolio’s resilience to large drawdowns and market corrections makes me feel that this is the ideal style to have during times of uncertainty.

Obviously, there are variations of this portfolio and it can be tweaked to be more aggressive or more defensive during certain times. In addition, if you create a portfolio similar to this, you must also ensure that you are rebalancing appropriately and assessing market conditions to make any necessary changes.


However you choose to build your portfolio, I urge that you do so in a balanced manner. Many investors focus on trying to achieve huge returns and think very little about protecting the downside. As mentioned earlier, market corrections are completely natural and if you do not plan for them, you will take a hit when they occur. Approach the market with a professional mindset and remember that it’s about consistency over long periods of time and not about trying to make quick big gains.

With a variety of factors that can affect that market at any time, it’s impossible to know exactly what will happen.

Always remember this – “We cannot always predict but we can prepare”

Benjamin Sparham (username BenSparham) is an eToro Popular Investor based in London with more than nine years experience. His portfolio is a diversified ETF selection designed to give balanced exposure to a variety of economic conditions.

This communication is for information and educational purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without taking any particular recipient’s investment objectives or financial situation into account, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to the past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the contents of this publication.

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