The financial press has been all a-flutter, of late, with talk of new highs across U.S. stock markets. Indeed, the Dow Jones Industrial Average set a new all time closing high in March. Meanwhile, the S&P 500, as of this writing, sits less than one percent below its all time high. The surge in these well known market bellwethers in recent months feels good, and no doubt tempts investors to bask in their portfolio gains, and to ease back in their fussing over the nuances of investment strategy.
Investors should resist this temptation. Instead, we suggest that they view the return to record highs in equity markets as an opportunity to review and strengthen — not ignore — the nuances of portfolio strategy, particularly portfolio resilience. Indeed, how many of us wished, in the depths of the financial crisis, for a second chance to protect our squandered peak portfolio values? Well, recent market strength has given us that second chance.
The most important tool that investors control to improve portfolio resilience is diversification. Diversification has, of course, been a central topic in investment strategy for many decades. However, I believe that the science of diversification has advanced considerably over the last decade. Not so long ago, investment strategists considered a portfolio with capital allocated across global stocks and global bonds to be well diversified. Today, not only has the set of building blocks included in a portfolio expanded, but also the methodologies for determining an effective asset mix have progressed. Modern portfolios combine not just stocks with bonds, but financial assets with real assets, traditional investments with alternative investments, and passive strategies with active strategies. Furthermore, savvy investors today determine the allocations to these categories with an eye towards balancing risks, not capital. Today’s high portfolio values provide an excellent occasion to deploy these advanced diversification techniques to strengthen portfolio resilience.
Two other important tools have gained relevance in recent times, as buy and hold strategies have struggled. Macro awareness is one, and opportunistic active management is the other.
The year 2013 is off to a great start, but is not even one quarter elapsed. Minding the nuances of diversification, macro awareness, and active identification of granular opportunity can help investors combine the pursuit of further gains with the sensibility of capital preservation.
The views expressed are as of 3/25/13, may change as market or other conditions change, and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts are accurate.
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