With major equity markets near their all-time highs and gold shining equally brightly, investors face a dilemma: Should they ride the wave or prepare for a potential downturn? With growing uncertainties and stretched valuations, are risks overwhelming opportunities?

Central banks worldwide are walking a tightrope between managing inflation and supporting economic growth, with outcomes ranging from a ‘soft landing,’ where inflation cools without much economic pain, to a ‘hard landing’ and no landing at all. Despite these economic uncertainties and geopolitical flashpoints in the Middle East and Europe, Indian markets have remained largely unfazed, continuing to push valuations higher.

While some of the economic news is positive, and India’s macroeconomic drivers look strong, higher valuations mean that future returns may not be as attractive, and downside risks are elevated. In this situation, investors should pause and assess their approach to ensure their portfolios are positioned for both opportunity and risk.

Ensure Proper Asset Allocation

The foundation of a solid investment strategy is the right mix of assets, consistent with an investor’s risk tolerance and financial goals. For example, a balanced portfolio – say, 45% equities, 35% fixed income, and 20% alternatives like gold and REITs – offers a blend of stability and growth.

In the current environment, chances are that any asset allocation mix is now towards equities due to their recent strong performance. It would therefore be prudent to rebalance this equity exposure as allowing it to run unchecked could increase risk levels beyond the comfort zone, especially at these valuations.

Source: Bloomberg, Morningstar, Sanctum Wealth

Make Tactical Adjustments

Beyond the strategic asset allocation, well-placed tactical adjustments in the shorter term can help improve returns or reduce risks by realigning the portfolio with current market dynamics.

Given the stretched valuations in mid and small-cap equities, we recommend an overweight stance on large-cap equities, which have risen less and are also more resilient during periods of volatility. In uncertain times, large caps tend to outperform due to their strong balance sheets and stable cash flows.

We also remain bullish on gold, despite its recent run-up, as global geopolitical uncertainties remain. In the fixed income space, we advocate an overweight position in longer duration instruments which tend to rise when interest rates are falling.

Deploy Systematic Investment Plans (SIPs) for Market Timing Confusion

For investors unsure about whether to increase or reduce their market exposure, systematic investment plans (SIPs) offer a structured approach to investing. Rather than trying to time the market, which is hard, investors can allocate capital at regular intervals, effectively averaging out the cost of their investments over time. This systematic approach can also help reduce the emotional strain that often accompanies volatile markets.

Brace for Volatility

Much of what goes wrong in investing has to do with investor behaviour rather than the investments themselves. Given that volatility is a feature of markets, not a bug, it is wise to expect it and avoid knee-jerk decisions that people often have when markets are gyrating.

Besides, volatility can also be an opportunity. Investors should consider increasing cash holdings to take advantage of opportunities that might arise during market corrections. Excessive volatility often creates entry points into high-quality assets at discounted prices.

Consider Hedging

More experienced investors, and others with the help of experts, could consider hedging strategies using futures and options. These financial instruments provide techniques to mitigate downside risk while allowing investors to retain exposure to potential market gains. That said, these strategies are not for everyone, and it is essential to fully understand the risks involved before diving in.

Conclusion: Stick to the Fundamentals

At the end of the day, successful investing is not about reacting to short-term market moves; it’s about maintaining discipline, preparing, and sticking to the fundamentals. By ensuring their portfolios are aligned with their goals, rebalancing as necessary, and making thoughtful tactical adjustments, investors can confidently navigate even the most volatile markets.

As always, having a trusted financial advisor can make all the difference in staying on track through market gyrations.

(The author is Founder & CEO at Sanctum Wealth)

Disclaimer: The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.