Legg Mason Global Asset Management
June 17, 2019
A leading global investment company with specialized expertise in equities, fixed income, and alternatives.

5 Principles for Smarter Portfolio Construction - #2 Beware the Tides of Sentiment

BEWARE THE TIDES OF SENTIMENT

Markets are driven by human behavior, which is subject to the influence of emotion. Irrational exuberance as well as irrational pessimism can skew demand; the result can be mispriced assets, and tendency for investors to enter and exit positions at exactly the wrong time. Consider 2017, when U.S. stocks dramatically outperformed their international counterparts. That relationship may or may not be sustainable: looking longer term can head off an over-optimistic allocation to U.S. assets.

Our view: It’s important to neutralize emotions tied to market movements which can impair judgement along with allocation decisions. That’s why we take a rules-based approach to designing portfolios, with formalized decisionmaking based on robust market data and the full breadth of academic insights available. This systematic approach discourages one-off adjustments by clients in response to sudden shifts in the markets, reining in investor’s worst emotional impulses.

***Click the banner below to view all 5 principals

More from Legg Mason Global Asset Management