As the risks of a market correction grow, switching to investments designed to provide steady capital appreciation makes sense.
Prepare for the unexpected
In the midst of a six-year ‘bull’ market, it is easy to forget the lessons of 2008 when numerous equity funds lost a large slice of their value – even if their fund manager outperformed the market or peer group.
All eyes on the US
As the largest economy in the world, the US is a strong driver of today's global growth. Output grew by just 0.2% in the first three months of 2015, but should start to pick up strongly. That would make the US central bank likely to start raising interest rates for the first time in six years – something to which financial markets are very sensitive. Risk assets have rallied sharply of late and a sizeable correction is possible. So if you invest in funds that only seek to profit from higher asset prices, what action should you take?
Focus on what matters most
With bond yields so low and assets more highly correlated than pre-2008 levels, what looks like a well-balanced portfolio may actually carry significant risk. Diversifying equities, bonds and property to reduce risk, for example, is unlikely to offer much downside protection. This could be costly if different assets sell off as US rates rise. The key is to focus on the ultimate investment objective, which is to grow capital rather than worry about benchmarks and peer-related performance.
Welcome to the new normal
Despite accommodative monetary policies and very low interest rates, sub-par growth has persisted in many developed economies. Growth and rates may not return to their historical average for some time, if ever. The implications on portfolios managed on the basis of pre-2008 economic and asset correlation norms are unclear. So switching into strategies designed to deliver specific goals in line with investors’ needs looks a wise move.