Investment allocations in times of volatility and economic instability
The stock price movements in the last quarter of 2018 were revealing about the role of misperceptions and overreactions, to changes in the growth trajectory, in the undervaluation of markets and created opportunities for earning alpha by diversification into a panoply of assets less susceptible to losses in a downturn.
Indices nosedived, falling five hundred to seven hundred points on successive days, as the twin fears of a slowdown in global growth and an overly rapid increase in interest rates by the FED, gripped the markets. Growth rates did drop, and the odds of persistent stagnation in Europe are perceived to be high as the IMF lowered its projected growth.
On the other hand, the widely recognized prospect of robust growth extending past 2019 in the USA was underpriced. The FED chief learned from experience and recognized the need for slowdown interest rate hikes. Rationality recovered, and the stock indices are now close to the peak in the third quarter of 2018. The upshot is that human perceptions played a role in the market swings.
Tactical Investment allocations: The downturn in the markets would not have blindsided investors with a disciplined and calculated approach not relying on human judgment for selling when the market turns downwards or moves upwards. Humans are susceptible to herd behavior which often does not see a downturn coming when markets trend upwards. Maven Asset Partners provides systematic investment strategies immune to momentary human impulses which cause poor investment performance.
Stock indices had peaked, as indicated by the fact that they were moving in a range, which was a reason for caution. An expanded core allocation in dividend yielding stocks or low volatility stocks in communication or health services at close to the top and increased tactical allocations, with more investment in technology stocks, at market bottoms would have yielded alpha when the markets recovered. Once bitten twice shy, humans overreact to losses incurred during downturns missing out on opportunities when the market turns upwards.
In the latest episode, the amplitude of the fluctuation was higher than before and behooves greater attention to wealth preserving tactical allocations to minimize downside risks. Diversification alone does not lower portfolio risk in times of macroeconomic risk which can drag down most assets with a correlated decline in returns. Multiple recessions have occurred with short intervals, some precipitous and others mild, between 2000 and 2017 and repeated drawdowns neutralize gains during an upturn.
Many more risk mitigation strategies exist today going beyond the traditional 60/40 equity and bond diversification rule with the proliferation of ETFs, securitized credit and real estate besides overseas opportunities. Risk mitigation strategies maximize Sharpe ratios and guard against downside risks. Health REITs, for example, remain stable during downturns.
Maven Asset Partners acts as a fiduciary to make decisions on investment allocations and provides turnkey management for the selection and oversight of managers who have a proven record in managing assets. Advisors are then relieved of the responsibility to manage portfolios that are far more complex than a choice of equity and bonds. Instead, advisors can focus on business growth and customer service.
Advisory services offered through Maven Asset Partners, LLC, an SEC registered investment advisory firm.
