Diversification & A Larger Time Frame Is Crucial To Period Survival Say Experts

With markets failing to hold onto Monday’s gains during the last day of the first quarter, and the day at a loss, as investors closed out a period of historic market volatility sparked by the coronavirus pandemic, and the worst quarterly performance in history, analysts are urging investors to focus on diversification and a longer timeframe perspective.

Meghan Shue, head of investment strategy at Wilmington Trust, says portfolio diversification is crucial during a volatile market like we are currently experiencing.

“Diversification is the biggest point there because we are in uncharted territory and we can look at historical drawdowns, we can look at historical analogs for different parts of this crisis. But there really is no precedent for it. And when we think about our portfolio, we are taking a nine-to-12-month outlook. We do think stocks will be higher over the next nine to 12 months, but we think there could be some further pain in the meantime. So, what that means is building a portfolio that is diversified, as I said, also has exposure to different types of environment. So, we are still constructive on more growth-oriented type of stocks, but we don’t want to be totally out of value because that is probably going to see a nice, very strong bounce when we do get to that bottom.”

A properly diversified ETF portfolio depends on each investor’s risk tolerance and time horizon but could include selections from gold, bonds, stock indices, and overseas markets. That means it might include funds such as the iShares Gold Trust (IAU) or the iShares MSCI Global Gold Miners ETF (RING), the SPDR S&P 500 ETF Trust (SPY) or the Vanguard Total Stock Market Fund (VTI). It could also include a bond fund like the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) or an ETF with international exposure like the Vanguard FTSE All-World ex-US Index Fund ETF Shares (VEU).

In addition to diversifying assets, Joseph Amato, president of Neuberger Berman Group, says not to expect a rapid recovery and to concentrate on long-term strategic allocation.

“We think that this is far from over. We think the crisis in multiple respects is still unfolding. The health crisis itself is unfolding, we still don’t know what the depth of that’s going to be and there’s a lot of pain to come, unfortunately. We also don’t have a sense of the depth and duration of the economic contraction that’s going to occur. So, while there was a rally off the lows within the last couple of weeks, we think there’s probably likely that you’re going to retest those lows as the extent of the economic contraction and its impact on earnings is fully digested over the course of the coming months. We emphasize certainly, whether it be an individual client or institution, to stay focused on the long term and not try to get too caught up with the movements because we’re going to see a lot more volatility and it’s very easy to get whipsawed. I mean just look at the last two or three weeks. You have days where you’ve had double-digit declines and double-digit gains, and your head spins if you’re trying to chase that market. So, stay focused on your long-term strategic allocation. If you’re a 60/40 allocator to equities and your balance has gotten off because of the decline in equity values, you know, increase that allocation over time. But you can take several quarters to do that.”

From an investment perspective, this could mean shifting the mix in a portfolio to weight risk-averse assets more heavily.

Other analysts agree that a longer term focus is important to keep in focus.

“There’s still tremendous uncertainty,” said Patrick Kaser, portfolio manager at Brandywine Global. “we can look at history as a guidepost for the market and the economy, but there’s not a perfect scenario.”

“In situations like this, the best thing for long-term investors is to figure out what they want longer term,” he said.

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