Investors may face greater challenges today than at any other time in history, given the uncertain economy and volatile markets.
So where can they turn?
Traditional investing wisdom holds that the solution is diversification, a concept based on the idea that by holding investments from different asset classes, the investor may increase his or her chances of obtaining a compelling total return.
Asset managers, however, diversify in different ways.
Some diversification strategies are passive, buying and holding securities for the long term regardless of market fluctuations. A mutual fund, for example, may have a prescribed hypothetical allocation mix of 50% equity, 45% fixed income and 5% alternatives that would not change, even as the equity market rallies and the fixed income market comes to a standstill.
Other diversification strategies are active, adapting to evolving market conditions by shifting assets in response to market fluctuations. Portfolio managers using such active strategies may have the flexibility to adapt to evolving market conditions by shifting entire asset classes in response to market fluctuations.
Advocates of active diversification strategies – also referred to as tactical-allocation strategies – believe these strategies can potentially be beneficial in volatile markets. When market risk is low, for example, the portfolio manager can increase exposure to growth by allocating assets toward the market’s top-performing sectors and countries. When market risk is high, the portfolio manager can preserve capital by shifting to a blend of high-quality, fixed income products and perhaps even cash.
Of course, no investing strategy is appropriate for every investor.
Your financial advisor can provide you with more information about what might be suitable for you given your individual financial circumstances, goals and risk tolerance.