Positioning your portfolio in turbulent times

As any experienced investor knows, all investment markets have ups and downs. Regardless of investor experience, turbulent times are a cause of anxiety, leading to poor decision-making. So if turbulent markets are inevitable, even if their timing is not predictable, how should portfolios be positioned in anticipation of and respond to market volatility?

What’s your objective?

First up, it’s important to go back to your investment objective. Is it to grow wealth over the medium to long term? Or are you more concerned with preserving capital? Your objective also needs to take into account your risk profile. How would you feel if, for example, the value of your portfolio dropped by 20%? Would it lead to you dumping volatile investments such as stocks, or would you see it as an opportunity to pick up some quality stocks at a discount?

With your risk tolerance and objectives clarified, it’s time to get your grips with asset allocation. This is the process of deciding what proportion of your portfolio will be allocated to each primary asset class: cash, fixed interest, property, and stocks. Some investors will also allocate funds to investments such as gold and managed investment funds.

Asset allocation is the engine room of your portfolio. The goal of allocating your assets is to minimize risk while meeting the level of return you expect. The percentage of your portfolio you devote to each depends on your time frame and your risk tolerance.

Asset allocation is also your crucial risk management tool as it determines the level of diversification across asset classes. However, the risk isn’t always a bad thing in this context. A higher risk portfolio may at times fall more in value than a lower risks portfolio, but it is also more likely to generate higher returns over the long term.

Rebalancing

Unfortunately, the motivation to position a portfolio for turbulent times is often a sudden upset in investment markets. But this doesn’t mean it’s too late to do anything. If your investment objectives and risk tolerance haven’t changed, rebalancing your portfolio (i.e. bringing the asset allocation back to its ideal position) may help position your portfolio for the next upswing in investment markets.

Waiting out the storms

While positioning can help with portfolio risk management, many investors opt to wait out any storms. Why? Because of all the ups and downs, bull markets and bear markets, bubbles and crashes, major share markets have delivered solid long-term growth. In fact, it has been claimed that investors have lost more money trying to anticipate corrections than they would have lost in riding out actual corrections.

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