MARKET volatility has been significant this year, with a tremendous spike over the past few weeks. For many investors, the focus has been on what to do at the moment to sidestep the sudden downturns.
For those investors who have built diversified portfolios with an eye toward a level of risk they can tolerate, critical actions have already been taken.
Market sentiment has grown decidedly anxious over the past several weeks, fuelled by continued debt risks in the Eurozone and mixed indicators on the future of US – and Global – economic growth.
As a result, volatility has risen and equities have borne the brunt of investor anxiety.
With the most reliable protection against the recent spate of stock market twists and turns, one that can bring investors some sense of calm, may well trace back to decisions they made months or years ago.
Barclays Wealth advocates our clients be invested across nine asset classes, in proportions that are tailored to each client's risk tolerance level and adjusted tactically to reflect our ongoing assessment of the three-to-18 month outlook for each asset class.
At the heart of this philosophy is the knowledge that asset classes don't all move in tandem. Results this year have certainly validated this view.
Consider how the nine asset classes we recommend for investors' portfolios have performed this year over two time periods, from January through June of 2011, and from January through August 23, 2011.
Over the first six months of the year, seven of the nine asset classes generated positive returns. Developed market equities posted the best return, with a 5.6%, ranging down to 0.4% for Cash/short-maturity bonds, with only commodities and alternative trading strategies in negative territory at -2.5% and -0.1% respectively.
Barely eight weeks later, the individual year-to-date returns through August 23 look quite a bit different. First, leadership has shifted to developed government bonds at 6.1%.
Second, what had been the leader just weeks ago, developed market equities, is now almost at the bottom of the range, with a return of -7.9%.
Third, the range of returns across the nine asset classes has widened. All of these shifts reflect the sudden change in the market landscape.
What has really captured investor attention is the extreme day-to-day swings in returns from the equity markets. The frequent reporting of various news media on that day's up or down move is exacerbating investors' sense of worry, spurring the desire to react on down days and to hold on up days. So it may come as a surprise to some that six of the nine asset classes were still in positive territory.
The idea of diversified portfolios is based on capturing this typical feature of various asset classes: that they don't all move in the same direction, or to the same degree, at the same time. By combining them, the investor will have exposure to the full range of results.
We work with clients to develop portfolios that mix the nine asset classes in proportions that are suited to each investor's specific tolerance for risk. We then recommend periodic adjustments to that mix based on our evolving outlook for each asset class, taking into account both return and risk expectations.
Certainly these turbulent markets are challenging to one's nerves and to one's wealth. But a carefully constructed, diversified portfolio can be a sound ally in maintaining both.
Andrew Miller, director, Barclays Wealth
