How to protect your portfolio from market swings

The stock market swings in recent weeks were no coincidence: geopolitical tensions, which seem to have subsided at times, have been added to the mix along with the uncertainties about growth and inflation. However, this situation is conditioned by short-term movements, which should not initially concern investors: "The core situation has not changed," says Alberto Matellán, chief economist at MAPFRE Inversión. That said, if a more worrisome situation were to arise in Eastern Europe, “the outlook would be different,” he adds.

Investors need to hedge against instability and external shocks. Is fixed income a good option? As it happens, bonds, which are highly sensitive to shifts in the ECB situation (the expectations point to monetary policy tightening), are experiencing a phase of wild fluctuations, with the 10-year Spanish bond at 1.3% and the German bund at 0.3%. Although they have been on firm footing in 2022, these figures “are still quite low in historical terms,” according to the expert, “and they seem unlikely to keep rising at this pace.”

Gold, one of the assets historically defined as defensive, could be an option in the face of political instability. Although this precious metal has the potential to shield investors against “periods of inflation and uncertainty,” there are several fronts where it would not offer protection: “It can even cause problems when monetary policy is hawkish,” Alberto points out. For this reason, he emphasizes that this asset must be chosen carefully, although “it can be a good part of a defensive portfolio.”

Gold isn't the only asset that could enhance your portfolio. Some sectors are truly helpful in the face of geopolitical tensions like those between NATO and Russia. "The insurance and banking sectors shield us against possible rate hikes and geopolitical crises." Other assets, such as commodities, which continue on their upward course, should be considered to hedge against “high prices and exogenous shocks.”

But all this is not enough. For less experienced investors who are looking to redesign their portfolios, large-scale changes that could alter the economic structure of a given region (such as Brexit or the conflict in Ukraine) “should be handled by a professional manager.” However, the expert clarifies that retail investors can adjust their own portfolios if they are facing personal circumstances that affect them directly. Still, in the middle of the storm, "it is best to ignore the everyday movements in the market and disregard the noise.”