Market volatility has been endemic in seemingly every single asset class since the financial crisis started in 2007. Investment managers offer a variety of ways to cope with this new paradigm, such as attempting to profit from the volatility by active trading, or providing diversified exposure to different asset classes.
But by utilizing a multi-method investing, rather than a single dogmatic approach, not only can the effects of market volatility be lessened, but a rational approach can be applied to the seemingly irrational world of financial markets. Many times, investors and even financial professionals are ignorant of the internal risks that their portfolio allocations carry. Many times the returns of the asset classes within these portfolios are highly correlated with each another, while low or negative correlation is more indicative of better portfolio diversification and lower risk.
This is often due to a lack of information on the part of the portfolio manager, but in the last several years the problem has been exacerbated by elevated correlations between traditional asset classes, making true diversity harder to achieve. Multi-method investing offers an alternative solution to the problem of diversification that may help mitigate overall portfolio volatility.
No One Tool Does The Entire Job
Multi-method investing allows investors to have a number of tools at their disposal to help them get the job done. Much like there is no one magic tool that does every job, multi-method investing allows an investor to utilize a number of different tools as appropriate for the task(s) at hand.
Among one of the most useful investment tips that can be offered, “don’t put all of your eggs in one basket” is probably the most quoted, but also the most applicable. Diversification often ranks as one of the most important topics addressed during the development of an investment portfolio. But investors and their financial advisors are often ignorant that diversification applies not just to individual securities and asset classes, but also to investment methods.
The Dangers of “Standing Still”
Better investing is characterized by a constant effort to adapt the portfolio to meet investor objectives as they shift over time. But for the do-it-yourself individual investor, there are pitfalls in a lack of time and information, and in being overwhelmed by so many choices.
Much like the proverbial “deer in the headlights”, investors are paralyzed due to a lack of information, an overabundance of choices, or a combination of both. When investors are stuck “standing still”, they are more vulnerable to market volatility. What is even worse is that they will find themselves in deeper trouble if they cannot effectively respond and end up doing something rash that they will end up regretting. For these reasons, seeking professional help may provide some solace.
The Markets Should Be Volatile, But Not Your Portfolio Returns
Although financial markets can and should be volatile, your investment portfolio returns should not. In fact, your investment portfolio should be flexible enough to weather a variety of market conditions, regardless of broader financial market shifts. The effects of market volatility can potentially be limited if an investor embraces a multi-method investing approach.