Wake up and smell the negative yield. And remember, while you were sleeping, the world has seen a sudden spurt in assets that are not fetching anything. On the contrary, you were working overtime just to preserve your capital and making ends meet. As an investor, your worst fear is very likely to come true. This relates, quite obviously, to large-scale losses, which you think may well perpetuate.

Debt and equity, the two major asset classes, have both suffered in recent days, triggering questions that the investors are fervently asking. Overall yields generated by portfolios are markedly low at the moment, barely covering the twin impact of inflation and taxes. Expenses are certainly not getting any lower, a condition that is set to compound the problem for the average participant.

If the negative yield trend is widespread, and right now all indications point to its sustenance, sooner than later this will severely impact investor interest.

If you are an ordinary investor, what should you do at the moment? Is there scope for consolidating your assets? Or should you simply lie low and expect better times to emerge in the days ahead? In other words, grit your teeth, swallow your frustration and hunker down?

The last one is the default option — it is also the one that would never appeal to the intelligent, motivated investor. The latter would like to derive the best out of even a depressed market. Let us now go through a few simple rules that would help one sustain in bad times.

Curtail leveraged positions

The whole world and its uncle seem to have borrowed money to create new assets. Such a practice has its merits, of course. However, it is also susceptible to pitfalls of the most bizarre sorts. In adverse market conditions, it is extremely difficult to unwind one’s leveraged position. However, that is exactly what is being prescribed at this juncture.

Get closer to cash

The astute investor would try to get closer to cash, at least as a temporary measure. That means certain investment decisions may have to be held back for now. This may also necessitate liquidation of some assets, especially the kind that is not likely to fetch anything right away.

Choose conservative debt

For all the negative news stemming from it, certain categories of debt are seemingly evergreen in nature. These will remain important in the days ahead as stable income streams would be necessary for sustenance. The same analogy would not really pertain to equity, commodities or real estate.

Smart investors, therefore, may well consider select categories of debt funds to match various investment horizons. The latter may range from just a few days to several years to 10 years and beyond if necessary. The trick is to identify conservative products that have high-quality (that is, well rated) securities. Credit risk is a very palpable threat these days, and investors must minimise their exposure to risky debt.

Reward yourself

When the going is tough, every opportunity to book profits must be exploited. Nevertheless, in a market as bad as the present one, such opportunities may not arise at all for long stretches.

Investors, therefore, have to remain fully alert — the idea is to take home whatever capital gains that can be generated, subject to clarifications on their taxation. Taxes, just like inflation, would ruin your chances to optimise your net returns. The latter is the real lodestar for investors everywhere.

What next?

Whatever your strategy, make sure it is based on the day’s realities, especially on renewed adverse conditions. At any rate, large swathes of the economy seem to be suffering significantly these days; indeed, sectors like automobiles, financial services and real estate have been in the news recently because of markedly negative developments.

On the equity side, there has been a general decline in valuations. While this can be attributed to a number of reasons, poor quarterly figures can be cited as a prime reason this season. There are, of course, a number of global and local factors that are working against stocks at the moment. The same applies to the debt market as well. In fact, debt assets are currently the cynosure of all eyes, thanks to the sudden increase in negative yield. The latter is set to spawn a major ripple on an international scale.

It is also very important to diversify one’s holdings, especially in favour of asset classes like commodities. Take, for example, gold, the traditional hedge against inflation that all investors, big and small, seem to like. Gold has supported portfolios throughout the ages, and the market has eagerly lapped it up time and again.

The extent to which gold or other assets would contribute to the overall holdings would depend on the allocation strategy, which again should be a function of risk appetite. For example, the decision to have, say, a 15 per cent exposure to gold should be backed by solid reason. The investor needs to know exactly why his exposure should not be more — or less — and how the other categories should individually account for the remaining part of the portfolio. The idea is to have the most appropriate mix to optimise returns.

The writer is director, Wishlist Capital Advisors