Monte Capital Group

Many high net worth clients wonder how to invest in volatile, unpredictable markets that at first appear difficult to comprehend. In particular they want their path to wealth creation to be smooth and steady without unnecessary stumbles, and they are willing to sacrifice some investment upside in order to do so.

In simpler days, portfolio managers would recommend a so-called “balanced” approach where a typical portfolio would have a blend of 60 percent stocks and 40 percent bonds. Small modifications to these percentages were allowed as risk tolerances changed. As investors age they typically desire less risk which generally involves more fixed-income exposure. A higher percentage allocation to fixed-income securities usually lowers volatility, but the world has evolved into a more complex set of investment opportunities.

For example, the “emerging markets” offer a wide range of stock and bond products to an investor. These products are attractive due to their higher returns and greater yields, but investors should remember that greater reward nearly always comes with greater risk.

For investors in emerging markets, it can be argued that their portfolios are already over-weight in these products. Instead of chasing additional yield, investors should look to larger and more stable markets for opportunities. Markets such as the US and Japan account for over half of the world’s fixed-income products. They offer a wide range of opportunities generally at a lower risk to reward ratio.

Rather than simply allocate assets on a percentage basis, we now construct portfolios with a full array of global asset classes, from global real estate to locally denominated debt funds. It turns out that the skillful addition of global investment strategies actually does help reduce swings in the portfolio - in a more efficient manner than the old 60/40 solution.

Many times clients fall into the trap of over-analyzing the investment returns of their individual holdings. It’s better to avoid looking too closely at a simple portfolio of stocks. In a properly diversified portfolio, not all stocks in the portfolio should be up all the time. The same is true for fixed-income instruments. (If that were the case, perhaps the next review would show those very same stocks and bonds all down simultaneously, too.)

Diversification provides value from the contrary or complementary movements of the many stocks and bonds in a portfolio and their exact proportions to each other. Be wary if your entire portfolio moves upward or downward in lockstep. This behavior indicates poor diversity.