How should LatAm investors diversify their portfolios during the downturn? Investment app Claritus.io’s CEO has an interesting response 

Saying it isn’t so won’t make it true – we are in bear market territory and have been for quite some time. Despite Cathie Wood of ARK holding’s attempt to call the bottom of the current downturn back in late January 27th stocks and cryptocurrencies continue to plummet as inflation ticks steadily upwards and a precariously overheated housing market begins to wobble.

So, what are investors supposed to do to hedge against this multi-headed dragon of a financial quandary? According to Claritus.io’s CEO Shai Azran, diversification is key and a rethink of the old 60/40 stocks to bond ratios needs an update. Here’s why:

“Depending on who you ask, the 60/40 model has been up for debate for quite some time. As far back as October some of the larger investment banks predicted that an era of lower returns was imminent, and advised investors to prepare by recalibrating their strategy that includes broadening their portfolios in general,” Azran said.

“The 60/40 model was the gold standard from Nixon until about 9/11, but what a lot of people forget is that between the dot-com bust and the start of quantitative easing at the end of the Great Recession, annualized returns on 60/40 portfolios were something like 2%. It really tells you something that 60/40 portfolios only started earning annualized 11% returns in an era when the Fed was literally printing money and giving it banks to buy stock with. The model has been broken for some time,” he added, noting how Sébastien Page, CEO of T. Rowe Price recently made an interesting comment in an interview he did with CNBC that suggests investors should broaden their portfolios by diversifying into alternative investment vehicles as a part of their traditional 40% bond holdings.

“Page suggested that investors reframe that 40% to include 12% liquid and illiquid alternatives, commodities and more,” Azran said. “And I agree with him when he says, “For too long alternatives have been overlooked.” Basically, if you want growth, you should invest in multiple asset classes – have multiple streams of revenue –  all flowing into your portfolio simultaneously.”

Azran notes that this new paradigm doesn’t mean that traditional assets like bonds still aren’t helping investors hedge their position in a volatile market. And with the price of assets like cryptocurrency at lows not seen in years, the high-risk reputation the entire asset class is ubiquitous for is softening slightly as bag holders double down.

“Although Claritus users’ average portfolios are far from the classic 60/40 split, we’ve seen an increase in bond positions within portfolios almost double in the last six months – despite only making up a small portion of the portfolio,” he added. 

So with that in mind, it appears investors are diversifying their portfolios into new asset classes while buying up bonds and dabbling in discount crypto. Although no investment strategy is fool-proof, alternatives are shaping up to be a good option as the current downturn continues and leaders and policymakers work to tame the current economic issues at hand.

Natalia Velez Lopera
Natalia Velez Lopera is a Colombian writer living and reporting in Colombia.