Regardless of perceptions of the success or failure of diversification, some asset managers and advisors who are portfolio managers take the view that diversification may not be sufficient for their clients’ needs to prevent loss of capital in times like the recession of 2007-2009. I recently asked Jerry Miccolis, Principal and Chief Investment Officer of Giralda Advisors to discuss asset allocation and portfolio risk management and his analysis, testing, and modeling of a number of index benchmarks based on S&P DJI and CBOE indices. I invite you to read our entire interview with him. For those short on time, Jerry told me that diversification is not sufficient for his clients’ needs because it will not guarantee “…sufficient risk management in times of severe market stress.” Jerry points out that during such times, it is possible for correlations among asset classes to rise and that the Great Recession provided a recent example of that.
Financial advisors and the asset managers who serve them can’t tell precisely when the next Great Recession will come. They have to decide in advance whether asset allocation is sufficient or whether they will follow a path of more aggressive risk management. Since proactive risk management comes at a cost, a tool which might help financial advisors to determine the value of risk management beyond diversification is appropriate benchmarks for risk-managed portfolios.
This article was written by Shaun Wurzbach, global head of financial advisor channel management, S&P Dow Jones Indices.
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