If one believes volatility will be higher, a legitimate strategy is to take positions in volatility instruments available in different parts of the market, but those options are not open to all investors or managers. A broader approach is to follow the textbook method of dealing with volatility via diversification and extension of investment time horizon to avoid being whipsawed by violent market moves.
Central bankers are increasingly indicating that the monetary safety net is being removed
Over the past decade diversification would largely have hurt a portfolio, buying US technology or a growth index and sitting on the beach would have been great investment advice. Now diversification is likely to be more important. We think being more selective within geographies, sectors, currencies, and stocks will add greater value in the coming years.
The changing central bank backdrop means that bonds will not necessarily offer the same protection to shocks that they did in the past and thus we would be cautious about taking too much duration risk.
Finally, as investors we must work even harder to avoid mistakes as higher volatility means the consequences of being wrong are greater; opportunities abound but risks have increased.
Stephanie Butcher is chief investment officer, and Benjamin Jones is director of macro research at Invesco.