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In farming, polyculture refers to the simultaneous cultivation of diverse crops. The idea is to build resilience to pest attacks through diversity; for pests that attack one kind of crop may be unable to affect a different kind of crop. In this article, we discuss how to apply diversity to build some resilience to your investment portfolio.
Creating diversity
Your portfolio is diverse if it contains different asset classes such as equity, bonds, and commodities. Diversification is the process by which you achieve diversity. You may, based on an asset allocation rule, decide to invest, say, 50 per cent in equity with the rest in other asset classes.
Your goal-based portfolios typically contain equity and bonds. Now, consider your equity investments whose values can decline because of, say, geo-political tensions and inflation — two factors that are of concern to most individuals in recent times. Empirically, gold prices have moved up during global crisis and during times of geo-political tension. So, gold ETF can be considered for your investment portfolio. Commodities have proven to be good investments during inflation. You should, therefore, consider commodities such as crude and metals that can lead to higher price levels (inflation) in the economy. Currently, exposure to commodities that have a strong linkage to inflation can be made only through derivatives. If you are uncomfortable taking exposure to derivatives, you will not, for now, have the diversity cushion in your investment portfolio to meet the adverse effect of inflation. Your goal-based investment portfolio will then contain equity investments (preferably large-cap ETFs), bonds (bank deposits) and gold (gold ETFs).
Conclusion
In a core-satellite framework, your core portfolio is tailored to meet your life goals, and your satellite portfolio is positioned to gain from short-term fluctuations in the stock market. Each life goal will have a different core portfolio, as the maturity of the bank deposit (your bond investments) will have to match with the time horizon for your life goal.
How does gold ETF fit into this investment framework? You can allocate some of your monthly savings through systematic investment in a gold ETF. This investment will be independent of any life goal, as the objective is to provide diversity to your total investments.
(The author offers training programmes for individuals to manage their personal investments)
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