Video: Hedge market risks: Review your goals
Build a liquidity strategy
Holding cash or safe short-term instruments allows investors to meet obligations without selling assets at depressed prices—critical if markets tilt toward our downside scenarios. Liquidity also provides flexibility to seize opportunities and the confidence to invest for growth. We recommend holding enough liquidity to cover up to five years’ expected withdrawals, since bear market recoveries can take time. Alternatively, investors may consider establishing a lending facility, which can provide access to funds without the need to liquidate investments during periods of market stress.
Get your asset allocation right, including quality bonds and alternatives
Strategic asset allocation is the most effective long-term hedge against market risk, in our view. We believe a diversified approach is all the more important in today’s volatile world, where risks are higher and outcomes less predictable. Diversifying across equities, fixed income, and alternatives can help reduce portfolio volatility and limit the impact of shocks—whether from geopolitics, debt-driven yield spikes, inflation, or AI disappointment. We recommend adequate allocations to government bonds, which tend to rally during periods of lower growth, and alternatives with low correlation to equities for added stability.
Substitute direct equity exposure for capital preservation strategies
Capital preservation strategies can limit downside risk while allowing some participation in upside. While returns may be capped in strong markets, such strategies reduce drawdowns and support long-term wealth preservation. Replacing some direct equity positions with these strategies can make portfolios more resilient to volatility and shocks.
Include an allocation to gold
Gold has historically been an effective portfolio hedge during market stress, geopolitical turbulence, or inflation fears. Its low correlation with equities and bonds means it can appreciate when risk assets decline, offsetting losses elsewhere. While gold does not generate income and its protective behavior is not guaranteed in every downturn, we believe a modest allocation—of up to a mid-single-digit percentage of total assets—can enhance diversification and buffer against systemic risks.
