When markets are shaken and stirred, the temptation is to make wholesale changes to portfolios.
Professional investors and wealth managers advise against doing so, of course, but there may be instances where changes are needed in portfolios.
One example of this might be when an investor becomes more conscious of environmental, social and governance issues and wants their portfolio to reflect their ethical values.
Another example could be when a client decides to make a significant life change, either brought about because of economic or health factors, which necessitates a change.
But otherwise, investors have been urged not to follow through with a knee-jerk reaction to market movements.
Sheldon MacDonald, chief investment officer for multi-asset at Marlborough, speaks to FTAdviser about how advisers and their clients are expected to make sense of what is going on in the world right now.
FTAdviser: Should we all just be closing our eyes, leaving our portfolios alone, and riding it out?
Sheldon MacDonald: The key thing is to maintain a long-term perspective and avoid any knee-jerk reactions, because trying to time the market is very difficult indeed.
To succeed, you have to get two tricky decisions right: when to sell and when to buy back – and that’s a very tall order.
Multi-asset managers can add value for portfolios through tactical tilts based on shorter-term market dynamics. This is more nuanced than the ‘in or out of the market’ blunt instrument.
So, for example, we’ve been increasing exposure to equity income funds.
That’s in part because stocks paying attractive dividend yields have outperformed the wider market during periods of high inflation since the 1970s.
FTA: Investment specialists have been promoting the benefits of diversification for many years now, so has the message finally got through?
SM: We’re certainly strong believers in the value of diversification, which the Nobel Prize-winning economist Harry Markowitz memorably described as ‘the only free lunch in investing’.
The decade of almost free money from 2010-20, when interest rates were at historic lows, saw all risk assets appreciate together.
More recently, many assets have fallen together. So, the benefits of diversification have been less apparent.
However, we’re anticipating opportunities in many asset classes, but we’re also expecting further volatility, so to smooth out the investor journey, diversification will be key.
FTA: What sort of allocation strategies are multi-asset managers using right now to help protect portfolios against rising inflation and exogenic shocks?
SM: In the bond portion of our portfolios, we’re watching carefully for the right time to begin a tactical shift from short duration to longer duration.
Rising inflation has driven bond yields up, meaning bond prices have fallen. So short-duration strategies, which are less sensitive to these pressures, have outperformed.