According to a recent survey conducted by BlackRock, “investors are uncertain about investing their savings, with only 35% confident that their retirement plan can cope with the ups and downs in the financial markets.”1
This leaves 65% of folks unsure of whether their portfolios can handle volatility and market declines over time, a number we think is too high.
Here are two ways to feel more confident about how your portfolio is positioned.
1) Diversify Your Portfolio Across Money Managers
Conventional investment wisdom tells us it’s a good idea to diversify across different areas of the market, as a means to reduce risk. Indeed, each year different asset classes perform better than others, and in some cases the best performing asset class one year can be the worst performing one the next (check out REITs from 2006 to 2007).
Asset Class Returns
(Click chart for larger version)
Source: Russell MSCI Dow Jones & Poor’s Credit Suisse Barclays Capital NAREIT FactSet J P Morgan Management. The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EMI, 25% in the Barclays Capital Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the CS/Tremont Equity Market Neutral Index, 5% in the DJ UBS Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data represents total return for stated period. Past performance is not indicative of future returns. Data are as of 12/31/13, except for the CS/Tremont Equity Market Neutral Index, which reflects data through 11/30/13. “10-yrs” returns represent period of 1/1/04 – 12/31/13 showing both cumulative (Cum.) and annualized (Ann.) over the period. Please see disclosure page at end for index definitions. *Market Neutral returns include estimates found in disclosures. Guide to the Markets – U.S. Data are as of 12/31/13.
With that in mind it makes sense to diversify across multiple asset classes to spread out risk and returns.
But we think there is another level of diversification investors need to consider— diversifying across different money managers.
Money managers tend to specialize in particular fields—large cap growth, international, fixed income, or dividend paying stocks, for instance. We believe it’s better to hire different money managers for their different specialties, instead of hiring one money manager to be the “jack of all trades.”
We think that approach makes sense, and we conduct research on various money managers and their specialized strategies so we can recommend them to our clients.
2) An Investment Plan to Determine Your Comfort with Risk
Your investment plan should factor-in how comfortable you are with experiencing market declines, and it should also show you how different asset allocations affect your portfolio’s growth over time.
For example, a portfolio with 100% equity allocation will almost certainly experience more volatile swings than a portfolio with 50% equity / 50% fixed income allocation, but 100% equity will also likely provide the investor with a higher probability of growth over time.
An investment plan can show you the various outcomes those different allocations produce, so you can get a feel for your growth potential while also gaining insight into how much your portfolio could decline during more difficult times in the market.
Feel More Confident About Your Portfolio’s Positioning
One of our Wealth Managers can speak with you about various money manager strategies we’re currently recommending, and we can also build an investment plan for you to show you how the asset allocation decision affects “ups and downs” in the market as well as portfolio growth over time. If you’re ready to learn more, please give us a call at 1-800-541-7774 today or get started by answering a few questions here.
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