Investors need to be truly diversified
![image](https://moneymanagement-live.s3-ap-southeast-2.amazonaws.com/s3fs-public/field/image/Diversified%20portfolio300.png)
![image](https://moneymanagement-live.s3-ap-southeast-2.amazonaws.com/s3fs-public/field/image/Diversified%20portfolio300.png)
Diversifying among asset classes without proper forecast performance expectations is simply diversifying losses, rather than avoiding them, Mason Stevens’ fixed income investment strategist Jesse Imer said.
According to him, the most important factor at the moment was that investors stayed truly diversified but also they needed to be tactical in their asset allocation.
This meant that currently investors needed to focus on non-correlated assets or trading strategies with investment managers that had mandates to achieve investors’ goals, Imer stressed.
“We’re entering a period of moderation with potentially lower returns in equities based on existing developed market valuations, but also of limited capital upside for bonds as interest rates are near the zero-lower bound,” he said.
Imer also reminded that Markowitz’ original Modern Portfolio Theory explained that the concepts were not meant to be confined to stock and bond portfolios only, but that Modern Portfolio Theory should be an ever-present mindset and that portfolio managers should remain vigilant to uncompensated risks from inherent correlations between similar investments.
He said that people read it that they needed to diversify stock portfolios with fixed income for the volatility smoothing effects but missed the overarching message that portfolio managers needed to manage risk to achieve forecasted returns.
Also, investors often did not have expected returns front of mind for markets while each incremental loss required a slightly larger gain to return to breakeven. For example, a 40% loss would require a subsequent 67% rebound/gain to breakeven and, likewise, a 50% loss a 100% rebound, or an 80% loss a 400% rebounded.
“Therefore, we must remember that we need to build genuinely diversified portfolios, then review them periodically as their past performance and diversification may not be suitable as financial markets evolve,” Imer said.
Recommended for you
Australian and New Zealand sustainable funds saw outflows of more than $1.2 billion in the second quarter of 2024, according to Morningstar, with active strategies accounting for the majority.
Maple-Brown Abbott has finalised an agreement to be acquired by a rival fund manager to create a firm with $18.6 billion in assets under management, just two months after its former CEO exited to lead Magellan.
Following a strategic review, Platinum has announced it will merge its two listed investment companies with two of its quoted managed hedge funds.
With potential US interest rate cuts on the horizon, Income Asset Management believes now is an ideal time to be investing into the corporate bond market.