DIY Investor Magazine
/
2015 Issue
8
GONE ARE THE DAYS THAT INVESTORS JUST HAD TO
BUY A BUNCH OF STOCKS AND A BUNCH OF BONDS
AND HOLD THEM TO SATISFY THE NEED TO DIVERSIFY
Diversification needs to be active, not passive. Gone
are the days that investors just had to buy a bunch of
stocks and a bunch of bonds and hold them to satisfy
the need to diversify. This strategy could have worked
in the 1980s and 1990s when equity markets kept rising
and bond yields kept falling over the long term. The two
major asset classes in portfolios, equities and bonds,
enjoyed a secular bull market.
But these days, when markets are volatile and
expensive, investors need to maintain diversification on
an ongoing basis by constantly seeking uncorrelated
assets and diversifying not only across and within
assets but also across risk factors that drive the returns
and risks of assets.
Selectivity. Identifying and selecting assets within
a broad investment opportunity set, and precisely
expressing market views, can distinguish between
opportunities and risks. For example, separating oil
exporting and oil importing emerging markets and
selecting those that can benefit from the drop in oil
price demonstrate what selectivity means. Treating
global emerging markets as a single block is a mistake.
Volatility brings risks, but also opportunities. Diverging
monetary policies, economic growth rates and inflation
cause assets to perform differently. This environment
is ideal for skilled selectivity to outperform the general
market.
Investors need to embrace volatility and not fear it.
The real risk of long-term investing is permanent loss,
not volatility per se. Volatility should bring a reward for
accepting the risk and it should bring opportunities for
selective investors as asset prices diverge.
Dynamism. When the expected returns from each asset
class are low, a dynamic approach seeks opportunities
across assets and everywhere.
Tactical asset allocation can add invaluable growth and
mitigate risks. The key is multi-asset investing with the
skill and common sense to do it well.
When the returns in one asset class, region or sector
are expected to be low or risk is expected to be high,
investors should shift their focus elsewhere to harvest
more attractive returns. In my view, there is no room
for rigid asset allocation anymore and those who are
nimble will prevail.
Yes, financial markets are going to be challenging. And
yes, volatility is going to be high. But in these market
conditions those who are diversified, selective and
dynamic can differentiate themselves. Extraordinary
times mean extra is needed to stand above the
ordinary.
Only by understanding the markets, always looking
out for what can go horribly wrong, can investors
apply the judgment needed in these uncertain times.
In uncharted territory it was the likes of Marco Polo,
Columbus, and Magellan who dared and succeeded.
This time is not different, but we have not been here
before.
The Investment Assets Handbook is published by Harriman House
