Many users within the Advise Only Community (the first investor social network) often ask us how to protect savings and how to invest in times of crisis. In this post we want to focus on three investment ideas that have been particularly successful: anti-crisis portfolios.
The main reason is that the three portfolios, originally presented in November 2011, have multiple meanings.
– In the first place they are investment portfolios specifically addressed to savers. Each portfolio was created, in the midst of the eurozone crisis and the Berlusconi government, with a specific objective: Euro OK (for the optimists who believed in a positive solution to the crisis in Europe), Euro Tsunami (for those who feared the default of the Italy and the split of the euro, attributing a relatively high probability to this scenario and Intermediate (for those who mainly saw a scenario dominated by uncertainty).
– As defined, anti-crisis portfolios represent the litmus test of the evolution of the eurozone crisis: Euro OK indeed favors investment themes that benefit most from the positive resolution of the crisis, while the opposite is true for Euro Tsunami. In other words: Euro OK rides the "Eurozone crisis risk" factor, while Euro Tsunami focuses on its opposite, let's call it the "Eurozone anti-risk" factor.
- And then there's the… training in the field. In fact, the Intermediate portfolio, investing in both risk factors mentioned, is a concrete example of how portfolio diversification works: an important and simple but often poorly understood concept, sometimes due to an excess of confidence, other times due to distrust of it (if you need a refresher, I invite you to read these two posts: portfolio diversification part I, portfolio diversification part II).
It's interesting to show the graph of the trend of the three portfolios together with that of the so-called "contagion risk" , system-level danger indicator, which we have talked about more than once on this blog.
First of all, I would like to give you a five-year perspective on the dynamics of contagion risk in the euro area: here is the graph from 2008, with the peak in autumn 2011 and the subsequent decline, which never fully normalised.
Now we offer you a graph with the performance of the anti-crisis portfolios together with the contagion risk trend (rebased so that, like the portfolios' performance, it is zero at their launch date).
I don't think the negative correlation between contagion risk and the Euro OK portfolio escapes you: when the first goes down, the other goes up. The correlation is instead positive for the Euro Tsunami portfolio, which behaves in the opposite way: if fear diminishes, the "safe haven" portfolio loses, otherwise it goes up (as happened in the first half of 2012, for example). In between is the Intermediate portfolio, more stable and less risky than both Euro OK and Euro Tsunami thanks to diversification.
The trajectory followed by the three portfolios thus reflects the process of solving the eurozone crisis: slow, tiring, full of mistakes (my personal opinion), but which avoided the breakup of the euro or a default by a country "of weight”, at least until now.
The journey for wallets in the coming months will remain tough and uncomfortable: although systemic and financial risk has decreased in the short term, the real economy of the euro area seems to be asphyxiated almost everywhere, given that the supposed recovery in Germany does not seem to find much response in other countries.
It's too early to say that Europe has come out of the tunnel, but that doesn't mean giving up your investments.
