Investors may have felt this year’s market environment has come straight from a horror film. Even the bravest of investors have been spooked by a combination of elevated political uncertainty, disappointing global growth, subdued momentum in corporate profits, and concerns that policymakers are “out of ammo”.
Nevertheless, diversified portfolios such as a typical 60:40 bond to equity allocation have so far performed well this year, with returns over 10% (in US dollar terms). The popularity of such allocations is understandable given this strong performance. But going forward, keeping this asset allocation might turn out to be a ghoulish mistake.
Investors need to think about the price they are asked to pay to own asset classes. It’s important to understand not just how the macro environment is evolving, but also what macro scenario is being discounted by the market. This means that rather than being “tricked”, investors are “treated” by the market.
Overall, investors don’t need to resort to the dark arts in order to conjure up positive performance. We think there are five key ingredients we need to mix into the potion for “investment success”:
- Portfolio allocations should be dynamic and adjusted over the course of the business cycle
- Don’t lose your nerve; over the long term keeping money invested can generate the best returns. A large allocation to cash is a costly strategy in the long-term
- Always look to effectively maximise diversification across geographies and asset classes
- Liquid alternatives like trend following and smart beta products can help improve portfolio risk-adjusted returns
- Focus on capturing targeted asset class exposure in an efficient and cost-effective way