[PB Notebook] Unpredictable Financial Market, What Ordinary Investors Should Do

Kim Ki-young, Team Leader at Shinhan Premier PWM Ichon-dong Center

Shinhan Premier PWM Ichon-dong Center Team Leader Kim Ki-young

One of the characteristics of financial markets is that asset prices are constantly changing. The KOSPI index, which fell more than 9% last year, has risen 8% this year, and the Hong Kong H-Index, which dropped 13% last year, has now increased 66% from its low point. Bitcoin, which surpassed $100,000 per coin amid expectations of Donald Trump’s election as U.S. president, actually fell about 6% after his inauguration, while gold prices have risen 7% since the beginning of the year.

In a market where asset prices are continuously changing, investors can adopt two strategies: prediction and response. If one can predict how prices will change in the future, they can buy or sell assets in advance to make a profit. However, since incorrect predictions can lead to losses, it requires effort to acquire and analyze a lot of information for accurate forecasting. It is also necessary to have trading techniques to prepare for the possibility of prediction errors. This is why prediction-based investing has become the domain of institutional or professional investors.

For ordinary investors, the response strategy remains. Fortunately, there is a response strategy that is easy for average people to follow and has proven to be highly effective. That is asset allocation. Asset allocation is a strategy of diversifying investments across various asset classes such as stocks, bonds, deposits, real estate, gold, and commodities with low correlations, and adjusting the investment ratios periodically. Diversifying into assets with low correlations can reduce the overall portfolio volatility.

The important thing is to determine the proportion of each asset according to one’s risk tolerance, target return, and fund usage plans. You can consult with financial institution experts, and nowadays, mobile apps can easily recommend asset allocation strategies tailored to your profile. You can also refer to asset allocation strategies from verified investment masters. For example, Ray Dalio, founder of Bridgewater Associates, one of the world’s largest hedge funds, employs the “All Weather Portfolio” strategy designed to deliver steady performance regardless of economic conditions. To make it accessible to individuals, he proposed the “All Season Portfolio” strategy: diversify investments with 30% stocks + 40% long-term bonds + 15% intermediate-term bonds + 7.5% gold + 7.5% commodities. Rebalancing once a year is essential.

Ray Dalio categorizes economic environments into four phases: growth, slowdown, high inflation, and low inflation, and designed the above assets to prepare for all phases. Specifically, stocks perform well during economic growth, bonds during slowdowns, and gold and commodities during high inflation periods. We can add domestic stocks and bonds as needed. Also, depending on the investor, some funds can be managed according to the “All Season” strategy, while others can be invested in promising assets.

Recently, funds and exchange-traded funds (ETFs) aligned with this asset allocation strategy have emerged. There are various asset allocation products such as Target Risk Funds (TRF), which select allocation ratios according to the investor’s risk tolerance, and Target Date Funds (TDF), which automatically adjust the proportion of risky assets according to retirement timing, enabling individual investors to easily utilize asset allocation strategies.

Kim Ki-young, Team Leader, Shinhan Premier PWM Ichon-dong Center