A diversified investment portfolio is designed to meet predefined investment goals. It’s often hard to stay the course when stress occurs. That’s when many investors make mistakes. Diversification means that not all investment risks perform the same at the same time. For example, managed futures and long/short funds have underperformed the last several years. Now many experienced managers are performing well in those categories.
We’d all like to be in the best performing areas all the time, but that’s just not possible.
Major market events tend to occur one or two times per decade. For this reason that a longer-term view can provide a useful perspective. We know that many investors incorrectly sold out of the markets during the tech bubble in 2000-2002 and again with record selling at the height of the 2008 great financial crisis. No one knows exactly how the current distress will play out.
I’ve been signaling for some time the issues in the high-yield bond market, issues that can present post Fed QE and zero interest rate policy, issues with unmanageable debt in Europe, Japan and China and the issues a rising dollar may trigger as it relates to the $9 trillion in EM debt that was borrowed in dollars. As much as I’d like to think I do, I don’t know for sure which or how and when any of the above risks present and the degree to which they might play out.
What we can do is build portfolios that are diversified across a number of risk factors and market environments. We can identify periods in time to become more or less aggressively positioned (overweight when valuations are cheap and underweight when they are expensive). We can manage risk not only by the collections of ETFs and funds selected but also how we combine them together. Diversification brings meaningful improvement to portfolios designed to achieve a return objective over a long-term period to time.
By Steve Blumenthal. See the full story in Trade Signals: Sell/Hedge the Rallies, Investor Pessimism Remains Extreme. | See important disclosures.
Want to know more? See the Understanding Correlation & Diversification Whitepaper.
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.