How to Approach Investment Risk in 2024

The
current
market
conditions
highlight
several
significant
challenges
for
investors.
The
key
at
this
juncture
is
accepting
the
reality
of
market
risks
while
not
becoming
unnerved
by
them.
It’s
easy
to
lose
one’s
bearings
amid
the
continuous
stream
of
market
news
and
speculation,
dubbed
as
“black
swan
hunting”.

As
investors,
it
is
critical
to
discern
this
noise
from
facts,
focusing
on
long-term
investment
strategies
rather
than
panic-induced
decisions
sparked
by
temporary
market
fluctuations.
If
anything,
lean
into
the
volatility
and
reframe
nervousness
as
excitement
for
opportunities.

As
we
stand
near
the
start
of
2024,
it’s
crucial
investors
harness
the
power
of
behavioural
science
in
maneuvering
through
the
risks
that
lie
in
the
landscape
of
economy
and
geopolitics.
As
a
starting
point,
let;s
collectively
agree
that
uncertainty
is
always
present,
with
at-times
terrifying
headlines
dominating
our
collective
consciousness.

Nevertheless,
equities,
which
make
up
the
lion’s
share
of
most
investors’
portfolios,
have
managed
to
return
7.4%
per
year
after
inflation
over
the
trailing
100
years
(S&P
500
total
real
return,
annualised),
allowing
investors
to
compound
returns
despite
two
world
wars,
the
Cold
War,
a
global
pandemic,
and
a
range
of
local
economic
crises.
That
shift
in
perspective,
from
the
narrow
“what
just
happened?”
to
the
broader
“how
do
market
cycles
evolve?”
is
key
in
helping
imperfect
decision-makers
choose
wisely
in
the
face
of
irreducible
uncertainty.

The
Market
Hates
Uncertainty
and
Negative
Surprises

The
resilience
of
the
broader
markets
may
be
cold
comfort
as
we
look
at
the
litany
of
known
risks
facing
us
at
the
start
of
2024,
particularly
for
those
with
shorter
investment
time
horizons.
The
samplings
below
are
top
of
mind
for
us.

This
collection
of
concerns
is
daunting,
but
it’s
worth
remembering
not
every
risk
requires
a
whole
new
portfolio
to
survive
its
realisation.
A
well-calibrated
portfolio –
a
collection
of
global
equities,
fixed
income
across
a
range
of
maturities,
and,
at
least
for
our
part,
carefully-selected
hedged
strategies
designed
to
limit
overall
interest-rate
risk –
should
weather
external
shocks
fairly
well.

In
other
words,
we
can
build
robust
portfolios
that
can
hold
up
to
a
variety
of
different
eventualities;
we
don’t
have
to
have
a
crystal
ball
to
know
what
is
going
to
happen
next.
Rather,
we
can
build
portfolios
that
find
and
protect
value
over
a
wide
range
of
“what
ifs.”

In
fact,
to
the
extent
an
external
shock
causes
sudden
negative
sentiment,
we
likely
would
consider
the
price
dislocation
an
opportunity.
That
was
the
case
during
the
coronavirus
pandemic,
for
example.
Recall
that,
in
March
2020,
global
equities
crashed
in
unison,
while
liquidity
concerns
froze
bond
markets,
including
the
US
Treasury
market,
which
is
known
as
a
global
safe
haven.
As
the
pandemic
developed
and
lockdowns
ensued,
we
had
no
greater
foresight
than
anyone
else
on
the
range
of
potential
outcomes.
What
we
did
know
was
asset
prices
were
getting
crushed
far
beyond
our
estimates
of
normalised
fair
value.

As
a
result,
our
portfolio
managers
around
the
globe

added
risk –
equities
(for
example,
energy
stocks),
high-yield
bonds,
emerging-markets
bonds,
and
more –
as
quickly
as
we
could.
The
rest
is
history.
After
a
22%
correction
between
February
20,
2020,
and
April
7,
2020,
global
equity
markets
rallied
tremendously.
Despite
the
massive
loss,
the
Morningstar
Global
Markets
Index
managed
a
16%
return
for
2020
in
its
entirety.

What
Techniques
Help
Portfolio
Risk?

Not
every
external
shock
follows
the
Covid-19
path.
Some
really
do
impair
cash
flows,
meaning
the
fair
value
of
the
asset
permanently
deteriorates.
A
recent,
extreme
example?
Russian
equities
in
the
wake
of
the
Ukraine
invasion.

In
other
instances,
a
portfolio
may
not
be
as
well
calibrated
as
the
investor
thinks.
Perhaps
that’s
because
a
position
wasn’t
sized
correctly
given
all
its
risks
or
the
underlying
fundamentals
of
an
offsetting
position
weren’t
fully
understood.
The
latter
has
been
the
case
for
investors
who
assumed
long-term
Treasuries
would
always
perfectly
offset
the
risks
of
equities.
While
big
returns
from
stocks
have
helped
recoup
much
of
2022’s
losses,
it
could
take
fixed-income
investors
longer
to
make
up
for
the
6.25%
annualised
loss
over
the
trailing
two-and-a-half
years,
given
the
traditionally
lower
returns
in
that
market.

Of
course,
none
of
that
matters
if
it’s
possible
to
predict
with
certainty
both
the
risk
and
the
ensuing
market
impact.
However,
we
argue
essentially
impossible.
Think
about
the
most
momentous
events
in
recent
market
history:
Covid-19
and
lockdowns;
global
inflation;
aggressive
central
bank
policy.
Few
of
these
developments
were
predicted
accurately,
and
if
a
particular
investor
was
able
to
call
one
risk,
they
were
unable
to
predict
the
rest.

With
an
appreciation
for
uncertainty
firmly
in
mind,
we
believe
the
best
approach
to
managing
external
shocks –
geopolitical
or
otherwise –
is
ongoing
fundamental
asset-class
analysis
and
careful
portfolio
construction.

With
these
two
tools
firmly
in
hand,
we’ll
walk
through
the
2024
risks
we’ve
identified.
We
include
the
expected
impact
of
these
risks,
any
opportunities
that
could
emerge,
and
potential
offsets
we
believe
could
mitigate
possible
damage.

Our
Approach
to
Handling
New
Risks
as
We
Enter
2024

Here’s
the
overarching
takeaway
for
external
risks
in
2024:
they
exist,
as
they
always
do,
but
we
believe
the
vast
majority
relate
to
volatility
and
present
as
much
opportunity
as
loss
potential.
The
very
essence
of
external
shocks
is
their
uncertainty,
both
in
timing
and
magnitude.

Without
question,
many
risks
potentially
have
a
higher
probability
than
what’s
on
this
list,
but
we
just
don’t
know
about
them
yet.
It’s
with
this
uncertainty
in
mind
that
we
think
having
a
robustly-constructed
portfolio
that
considers
the
full
range
of
outcomes
is
a
critical
component
to
investing
success.

Valuation
Risk
is
Often
Ignored,
But
Really
Matters

Overvaluation
risk
is
a
real
problem
that’s
never
featured
on
the
laundry
list
of
what
can
go
wrong.
Everything
has
a
price,
with
swings
in
perceived
risk
creating
potential
mispricing.
No
bad
news?
Likely
elevated
valuations.
A
lot
of
perceived
risk?
Possibility
of
attractive
prices.

Some
great
companies
have
high
valuations
and
need
significant
growth
to
deliver
on
market
expectations.
In
this
regard,
we
believe
the
very
narrow
market
leadership
of
large-cap
US
technology
names
in
2023
has
provided
an
interesting
investing
landscape
looking
ahead
to
2024
and
beyond.
Much
of
the
US
market’s
gains
in
the
first
half
of
2023
were
driven
by
the
extraordinary
returns
of
just
a
handful
of
companies.
It
is
not
to
say
that
the
so-called

“Magnificent
Seven”
are
not
great
companies,
but
they
do
have
high
valuations
and
need
significant
growth
to
deliver
on
market
expectations.

Said
simply,
some
markets
have
no
room
for
error
or
disappointment.
Other
markets
are
priced
for
a
story
of
despair – China
equities,
for
equities –
where
only
a
little
needs
to
go
right.
Fundamentals
matter,
especially
with
higher
rates,
so
investing
where
there
is
a
valuation
buffer
or
margin
of
safety
is
key
for
the
years
ahead.
This
is
a
story
that
we
see
play
out
again
and
again
in
markets.

Will
There
be
Upside
in
China?

To
be
clear,
we
acknowledge
the
uncertainty
that
surrounds
these
markets,
and
we
have
no
better
clarity
than
others
on
how
it
will
play
out.
To
manage
those
concerns,
we
rely
on
scenario
testing
to
determine
our
positioning.
Here’s
what
we
ask:

1.
How
much
can
we
own,
assuming
the
worst
happens,
without
jeopardising
our
overall
portfolio
outcomes?

2.
Do
we
have
overlapping
exposure
here
that
we
don’t
see
at
first
blush?
How
can
we
manage
these
risks?

Valuations
are
an
underrated
tool
to
shift
the
risk
to
reward
in
your
favour.
And
where
headline
risks
are
plentiful,
we
often
find
tomorrow’s
golden
opportunities.

New
Risks,
Consistent
Approach

Patience
and
perspective
are
key
in
the
world
of
investing.
Before
making
any
move,
consider
what
is
already
priced
in
and
how
the
markets
have
already
adjusted.
While
risk
might
initially
sound
intimidating,
it
isn’t
always
a
bad
thing.
Risk
can
be
a
catalyst
for
opportunity
if
managed
with
care.
After
all,
in
the
world
of
investments,
risk
not
only
creates
a
possibility
of
loss
but
also
forges
avenues
for
gain.

Risk
and
reward
are
different
sides
of
the
same
coin,
and
investors
cannot
expect
outsize
gains
without
taking
on
some
risk.
This
does
not
feel
intuitive,
as
our
brains
are
not
wired
for
patience
or
for
eagerly
embracing
uncertainty.
Histrionic
headlines
don’t
help.
However,
discipline
and
long-term
perspective
are
never
out
of
style
and
investing
principles
can
pay
off
most
handsomely
during
turbulent
times.

While
the
risks
we
face
as
we
enter
2024
are
significant,
they
are
not
insurmountable.
The
keys
are
to
stay
calm,
focus
on
the
long
term,
sift
through
the
noise,
and
apply
robust
risk-management
techniques.
Remember,
even
in
the
face
of
risk,
opportunity
lies.
Armed
with
a
thorough
understanding
of
the
market,
sound
strategies,
and
a
cool
head,
investors
can
not
only
weather
the
current
market
conditions
but
also
find
potential
opportunities
amid
them.

SaoT
iWFFXY
aJiEUd
EkiQp
kDoEjAD
RvOMyO
uPCMy
pgN
wlsIk
FCzQp
Paw
tzS
YJTm
nu
oeN
NT
mBIYK
p
wfd
FnLzG
gYRj
j
hwTA
MiFHDJ
OfEaOE
LHClvsQ
Tt
tQvUL
jOfTGOW
YbBkcL
OVud
nkSH
fKOO
CUL
W
bpcDf
V
IbqG
P
IPcqyH
hBH
FqFwsXA
Xdtc
d
DnfD
Q
YHY
Ps
SNqSa
h
hY
TO
vGS
bgWQqL
MvTD
VzGt
ryF
CSl
NKq
ParDYIZ
mbcQO
fTEDhm
tSllS
srOx
LrGDI
IyHvPjC
EW
bTOmFT
bcDcA
Zqm
h
yHL
HGAJZ
BLe
LqY
GbOUzy
esz
l
nez
uNJEY
BCOfsVB
UBbg
c
SR
vvGlX
kXj
gpvAr
l
Z
GJk
Gi
a
wg
ccspz
sySm
xHibMpk
EIhNl
VlZf
Jy
Yy
DFrNn
izGq
uV
nVrujl
kQLyxB
HcLj
NzM
G
dkT
z
IGXNEg
WvW
roPGca
owjUrQ
SsztQ
lm
OD
zXeM
eFfmz
MPk