Positioning your portfolio when markets are on the rise is easy, right? You simply load up on growth assets and enjoy the ride.
However, in reality, we all know that investing isn’t that easy. This article identifies a number of key strategies that investors should consider when markets are at their most volatile.
As any experienced investor knows, all investment markets have their ups and downs. Regardless of investor experience, turbulent times are a cause of anxiety and that can lead to poor decision making. So, if turbulent markets are inevitable, even if their timing is not predictable, how should portfolios be positioned in anticipation of, and in response to market volatility?
What’s Your Objective?
First up, it’s important to go back to your investment objective. Is it to grow wealth over the medium to long term? Or are you more concerned with preserving capital? Your objective also needs to take account of your risk profile. How would you feel if the value of your portfolio dropped by 20%? Would it lead you to dumping volatile investments such as shares, or would you see it as an opportunity to pick up some quality shares at a discount?
With your risk tolerance and objectives clarified, it’s time to get to grips with asset allocation. This is the process of deciding what proportion of your portfolio will be allocated to each of the major asset classes: cash, fixed interest, property and shares. Some investors will also allocate some funds to investments such as gold and absolute return funds – managed investment funds that seek to make a profit from both rising and falling markets.
Asset allocation is your key risk management tool as it determines the level of diversification across asset classes whose values may move reasonably independently of each other. The more you allocate to shares and property the greater the volatility, and therefore the risk. However, in this context, the risk isn’t always a bad thing. A higher risk portfolio may, at times, fall more in value than a lower risk portfolio, however, over the long term it is also more likely to generate higher returns.
Oops, it’s too late
Unfortunately, the motivation to position a portfolio for turbulent times is often a sudden upset in investment markets. This doesn’t mean it’s too late to do anything. If your investment objectives and risk tolerance haven’t changed, rebalancing your portfolio (i.e. bringing the asset allocation back to its ideal position) may help you position your portfolio for the next upswing in investment markets.
Waiting out the storms
While positioning can help you with portfolio risk management, many investors opt to wait out any storms. Why? Because for all the ups and downs, bull markets and bear markets, bubbles and crashes, major share markets have delivered solid long-term growth. In fact, it has been claimed that investors have lost more money trying to anticipate corrections that they would have lost in riding out actual corrections.
A detached view
Concerned about the financial outlook and your portfolio’s current position? As financial planners, Tanti Financial Services provide a thorough assessment of your portfolio, identifying your objectives and understanding your risk tolerance. We will recommend investments that will help you weather the turbulent times.
To find out more about your current positioning, talk to our team at Tanti Financial Services on (02) 4735 6644.