While it’s impossible to forecast every market development, it’s important to “to get the big things right.” With the U.S. economic cycle maturing, central banks increasing borrowing costs and geopolitical risks threatening growth, many are thinking the next “big thing” is to time a market sell-off, which Aura doesn’t recommend.
Staying invested and having a plan in place are what work best in the long term. More specifically, there are five “big things” Aura believes you should consider when investing in a more volatile environment.
Looking beyond passive approaches
During periods of monetary policy uncertainty, equities and bonds can rise and fall together, making traditional portfolios less diversified and therefore riskier.
Global stocks fell as much as 9% starting in late January, while bonds also fell 1%
Hedge funds have historically outperformed during periods of rising U.S. interest rates
Smart beta strategies are less correlated to broad market moves
Building in downside protection
With volatility increasing, it’s important to protect your portfolio from large market declines.
2018 has seen 10 days with >1% drawdown, compared to just 2 in all of 2017
Put options on the S&P 500 can help protect portfolios against large equity market falls
U.S. government bonds have provided positive returns in 96% of all stock market losses since 1926
Improving credit quality
Many investors may now be exposed to riskier companies after chasing yields while interest rates remained low.
U.S. 10-year Treasury yields are now around 3%
Aura is overweight U.S. 10-year Treasuries as rising yields now make them an effective substitute for riskier high-yield credit
Diversifying concentrated holdings
A globally diversified portfolio can reduce exposure to specific local or regional risks around the world.
Since the start of 2018, the MSCI AC World Index has seen 40% fewer daily moves of greater than 1% than the S&P 500
Aura recommends an overweight to global equities instead of concentrating on just one region
Thinking about the long run
You can find more certainty and also boost both financial and non-financial returns by expanding your time horizon.
Assets with exposure to secular growth drivers can help improve your portfolio performance and reduce risk. And you can avoid behavioral pitfalls by redefining risk as meeting financial goals, instead of day-to-day volatility.
Thematic investments uncover assets with exposure to secular growth drivers to help reduce risk
Private markets can offer higher returns and prevent selling temptations in exchange for illiquidity
Sustainable investments can positively impact society and the environment without risking returns
Liquidity. Longevity. Legacy. Rather than think of risk as day-to-day market volatility, you should view risk in terms of failing to achieve your long-term financial goals. This is the rationale behind our Liquidity. Longevity. Legacy. wealth management approach.
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