Since Covid-19 turned the world upside down, it is unsurprising that many investors’ risk appetite and objectives have evolved.
Some investors may have dialled down their risk tolerance, while others aiming to meet short-term ambitions may have pushed out their horizons, thinking about the future a little more carefully.
Many will be seeking a solution that will serve them through all weathers.
Navigating the current market backdrop has undoubtedly presented new challenges to investors.
While financial markets – and the companies and economies that underpin them - remain susceptible to Covid-19-related shocks and dramatic falls in investor sentiment, major structural shifts through the pandemic have also changed the way traditional correlations are playing out across portfolios.
For example, with record levels of monetary and fiscal stimulus continuing to support large parts of the global economy, the outlook for fixed income, and its role in diversified portfolios, has come to look radically different.
As economies re-open, many investors will be keeping a watchful eye on headline inflation figures. Given that markets tend to be more volatile when inflation is rising, and in view of current elevated valuations across equity markets, some investors may be questioning whether this is the right time to invest – or stay invested – in equity markets.
Despite the potential for volatility in the short term, we know the dangers of delaying investing or pulling money out of the market too soon.
Over the coming months, we expect to see a much stronger post-Covid economic restart – rather than a more normal recovery. This backdrop increases the breadth of the opportunity set – but also heightens the risks in a more uncertain environment.
While the restart bolsters our pro-risk stance over the next six to 12 months, many investors do not want to take active decisions on a short- or even long-term basis.
Low-cost, long-term diversification can deliver an all-weather solution for those wishing to avoid having to ‘time’ the markets in order to benefit from the Covid recovery.
By investing in a risk-managed, cost-effective multi-asset vehicle, investors can aim to participate in the upside, mitigate the downside and, critically, can benefit from being in the market long term.
Navigating the journey
In our view, there are four core factors that could help investors navigate a more uncertain environment.
Build diversified portfolios
Asset allocation and risk management processes are designed to correspond with where investors are in their financial journey and where they wish to get to.
A traditional 50/50 bond to equity portfolio will likely see volatility spike at key points in the market cycle, while more dynamic asset allocation looks to manage volatility at a suitable level whatever is happening in the wider market.