The coronavirus has not only severely disrupted our lives, but also our economies. Massive interventions by central banks and governments have so far averted the worst. But this might change in the future, as infections around the world are soaring and aggressive government measures continue to restrict free economic activity. While prices of stocks and bonds have fully recovered from their March lows and in many cases reached new heights, the performance of most businesses is lackluster at best. It is clear that the disconnect between asset prices and the real economy can’t go on forever.

Among academics, analysts and businessmen there are heated debates about the direction of the world economy. Forecasts range from a “V-shaped recovery” to a “Greater Depression”, from deep deflation to hyperinflation, and from booms to busts in asset prices. Countries will not all be affected in the same way. Some might only experience a minor recession, while others could face a complete breakdown of their economy and society. Performance between industry sectors and even within the same sector will also vary to a large extent.

It is in times of crisis that old fortunes are lost and new fortunes are built. Staying on the sidelines is not an option. Instead individuals should allocate enough time, to review all assets and make far-reaching changes if necessary. Investments that have performed great over the past 5-10 years, might become losers and the other way around. And it might make sense to invest in various asset classes, that were previously ignored.

With the current uncertainty, it is more important than ever for investors to build a diversified portfolio, that can perform well in different scenarios. Most people only think about asset diversification, but in the current crisis, diversification among jurisdictions and custodians is equally important.

Asset diversification

A well-diversified portfolio is composed of various assets with low or even negative correlation. This means, that not all assets go up or down at the same time. Instead when some assets go up, some stagnate, and the rest goes down. It is possible to avoid larger diversification by hedging the risk of each asset or asset group with the use of options, futures or other financial instruments. But those are the tools of true professionals.

The ordinary investor with limited knowledge of financial instruments, should aim to spread risk between various asset classes, and within each asset class among various individual titles. This means, don’t put all your money in either equities or real estate. Instead consider other asset classes as well. And if you are invested in equities, don’t put all your money into a single stock, but invest in various stocks, preferably from different industries and with different risk profiles. 

Being invested in various asset classes is not necessarily sufficient. Do you consider a portfolio invested 25% in stocks, 25% in bonds, 25% in insurance policies, and 25% in cash to be diversified? Most people would probably agree, we don’t. Normal life insurance policies, bonds and cash are all denominated in fiat currencies, be it USD, EUR, GBP, CAD or AUD. If there is high inflation, they will rapidly lose most of their value. As prices of stocks have gone up considerably over the last decade, fueled by artificially low interest rates and massive money printing, they are also not immune to changes in the value of national currencies. Despite being invested in various asset classes, the portfolio is heavily dependent on the performance of fiat currencies. If they fail, the portfolio fails.

In normal times, fiat currency risk is not an issue. But we are not living in normal times. Governments and central banks have already made it clear, that they welcome inflation. Originally the target was 2%, but recent statements indicate, that authorities are willing to accept much higher inflation. This comes hardly as a surprise. If they ever want to get rid of record debt levels, which currently stand at 331% of world GDP, they need to inflate debt away. A truly diversified portfolio should include assets exhibiting low or no correlation with fiat currencies. And the main candidates for this are (physical) gold and silver as well as Bitcoin.

International diversification

Many people have all their assets in their home country. Even if they have bought foreign stocks and bonds, those are usually kept with a local bank or brokerage firm. This is certainly convenient, but also risky.

Being heavily exposed to a single jurisdiction can have devastating consequences. Most Western governments are heavily indebted, and the debt pile is growing. It is just a matter of time, until governments start raising taxes, especially on real estate, that by definition can’t run away. But they won’t stop there. By promoting zero or negative interest rates, authorities have already stolen billions from savers. They will have no scruple to enact measures to expropriate additional assets, either covertly or openly.

If you still have enough funds, don’t count on being able to spend them freely. To prevent bank runs and capital flight, governments have already started to restrict the free use of money. Larger cash deposits or withdrawals require a lot of paperwork or are even illegal. More restrictions are being prepared. Greece, a member of the EU and the Eurozone, has shown the way. To deal with the economic crisis of 2015, the Greek government decided to limit weekly ATM cash withdrawals to 420 EUR, severely restrict credit/debit card use abroad and enact other capital controls. It can happen tomorrow in our home country.

The crisis will not equally affect countries, and governments will react differently to the challenge. If you live in an allegedly stable jurisdiction in Europe or North America, you might find out very soon, that your economic freedom is being suppressed and your personal wealth is taken away from you. Holding some of your assets in other jurisdictions with a strong track record in protecting private property, will help to preserve your wealth. Storing assets away from home might also facilitate a move abroad, if the situation in your home country becomes intolerable.

Diversification among custodians

Banks and financial advisors urge you to invest all your money with them, allegedly to save fees and get a better service. This might or might not be the case, but we prefer to keep our assets with various custodians to reduce counterparty risk.

Many people still think, that banks are safe and that in the worst case, they can rely on a government-backed deposit protection theme. This is wishful thinking, especially in Europe where many banks are already on the brink of insolvency. With so-called “bail-ins”, which are already statutory in the U.S. and Europe, insolvent banks can use the money of unsecured creditors (such as savers) to restructure their capital to stay afloat. If you think this won’t happen in the Western World, just look at Cyprus, a member of the EU and the Eurozone. As part of a 10 billion bailout by the European Central Bank (ECB) and the International Monetary Fund (IMF), Cyprus agreed in 2013 to accept a bail-in at two of its insolvent banks, resulting in substantial losses for deposits above 100,000 EUR. If the current crisis deepens, such ‘haircuts’ will start at much lower levels and government deposit insurance schemes will not have enough money, to comply with their “guarantees”.

Insurance companies, brokerage firms and financial advisors are also not immune to bankruptcy. The longer the current crisis lasts and the deeper it gets, the more custodians are at risk of suspending services for several weeks or going out of business altogether. Eventually you should get some of your money back, but this might take months or even years. In the meantime, you would have to live without it, which might prove disastrous, if you lose your job or need funds for other purposes.

At a time of declining business ethics and loose oversight, there is growing custody risk due to fraud. You might remember the case of Bernard L. Madoff Investment Securities LLC, that ran a Ponzi scheme costing its 4,800 clients about USD 65 billion. There are plenty of similar examples all over the world. Once the current crisis progresses, more cases of deception and gross negligence will be exposed. Be aware that despite monthly account statements issued by your bank or financial advisor, you can’t be 100% sure that the securities listed there were really bought for you, and that they haven’t been sold, leased or hypothecated in the meantime.

Considering the high risk of keeping all or most of your assets with one custodian, it is always recommendable to diversify among several custodians. This applies even more in the current crisis. Using at least two banks and two brokerage firms will certainly increase fees and personal workload, but this is more than offset by the reduced risk. Additional custodians in another jurisdiction should be added, as shown above. The same applies for other assets. To store all your gold and silver in just one vault, or all your Bitcoin in a single wallet, might have disastrous consequences.

The extent of the current crisis calls for an in-depth review of your total portfolio and sufficient diversification among assets classes, jurisdictions and custodians. If you are unclear how to do it, please contact us at


Disclaimer: The above is for informational purposes only. It is not an offer or advice to buy or sell any products or services. Adexo Ltd does not provide specific investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this blog.