In our last piece, we described why most investors should ignore the never-ending onslaught of unpredictable financial investment news and tend to three strategies that can be much more readily managed – at least once you know they are there. Hidden in plain sight, these potent strategies include:
- Being there
- Managing market risks
- Controlling costs
Plain-Sight Strategy #2: Managing for Market Risks
Don’t take on more risk than you must.
There is no getting around the fact that the market does not deliver rewarding returns without periodically punishing us with realized risks. That is why it’s so challenging for most investors to “be there,” consistently capturing available returns by remaining invested over time. It’s also why it’s vital to avoid taking on more risk than you must in pursuit of your personal goals. For this, we have two powerful tools at our disposal, best used in tandem.
Diversification: Eliminating Unnecessary Risk
Diversification helps you spread your risks around. If you instead concentrate your portfolio on too few holdings, sectors, or geographical locales, you may feel you’ve made smart selections when they happen to be doing well. But when bad news hits an undiversified portfolio, it often arrives without warning, and with a vengeance. That’s a real risk that investors too often ignore at their own peril.
For example, sometimes, tech stocks are red hot; sometimes domestic securities may seem safer than international choices – or vice-versa. Your company’s stock or a popular IPO (Initial Public Offering) may seem like a sure thing. But by trying to position yourself to catch the next trend or dodge some bad news, you’re also accepting the risk that your “sure thing” may fail you.
Decades of academic inquiry have informed us that, despite the risks, there are no extra returns expected by trying to consistently predict individual winners and impending losers. Instead, you are best off eliminating this form of risk by putting diversification to work for you.
Asset Allocation: Minimizing Unneeded Risk
While some risks can be diversified away, some remain. These are expected to enhance your long-term returns if you build them into your total portfolio and if you stay the course with them over time. They include a handful of factors, categorized into asset classes such as:
- Equity – Stocks (equities) have returned more than bonds (fixed income).
- Size – Small-company stocks have returned more than large-company stocks.
- Value – Value companies (whose stocks appear to be either undervalued or more fairly valued by the market) have returned more than their growth company counterparts.
- Term – Bonds with distant maturities or due dates have returned more than bonds that come due quickly.
- Credit – Bonds with lower credit ratings (such as “junk” bonds) have returned more than bonds with higher credit ratings (such as government bonds).
By blending a customized mix of riskier and less risky asset classes into your portfolio, you can seek to build wealth toward your personal financial goals while fine-tuning the risks involved. In contrast, chasing returns you don’t actually need can result in sacrificing what you’ve already accumulated if the risk is realized. Why go there?
Fixed Income: Adding Stability and Balance
Fixed income investments can play a key role in providing both a reliable income stream and an added layer of diversification to your portfolio. These typically consist of bonds and similar securities that pay regular interest, helping to smooth out the ups and downs that can come with more volatile holdings like stocks.
By including fixed income options—such as U.S. Treasury bonds, municipal bonds, high-quality corporate bonds, and even international fixed income vehicles—you can establish a cushion against market swings and help offset risk exposures found elsewhere in your investments. Managers such as PIMCO, BlackRock, and DoubleLine, among others, offer a range of strategies that aim to balance stability with the potential for reasonable, risk-adjusted returns.
Ultimately, a thoughtfully constructed allocation to fixed income can act as a steadying force, creating a more resilient portfolio through both the predictable and the unexpected.
Diversification and Asset Allocation: Your Double Defense
Investment risks are most effectively managed by using the combined powers of diversification and asset allocation. Many investors believe they are well-diversified when they are not. They may own a large number of stocks or stock funds across several accounts. But upon closer analysis, the bulk of their holdings may represent one or two factors, such as mostly large-company domestic stocks. They may think they are managing their risks through diversification, but by failing to implement appropriate asset allocation, the excess risk remains.
If there is such a thing as a free lunch for investors, it’s enjoyed by making the best use of market risks and expected returns. Diversification helps you eliminate unnecessary risk – the kind that is not expected to improve your investment returns, to begin with. Guided by your financial goals, asset allocation helps you diversify appropriately to minimize unneeded risk and properly manage the market risks that must remain.
In our next piece, we’ll introduce one more plain-sight strategy for investment success: controlling the costs involved.
Actively Managed, Broadly Diversified Portfolio Options
So, how can you put these principles into practice if you’re interested in a professionally managed approach? One option is to select actively managed portfolios built around broad diversification, using mutual funds or ETFs that span different asset classes, regions, and sectors.
There are a variety of managers and platforms out there—think of names like Vanguard, Fidelity, or BlackRock—that offer portfolios designed to balance risk and return through exposure to global stocks, bonds, and sometimes even alternative assets. These portfolios typically feature:
Multiple Asset Classes: Combining domestic and international equities, fixed income, and potentially other categories like real estate or commodities.
Active Oversight: Professional managers routinely monitor and adjust holdings in response to shifting markets and economic outlooks.
Diversification Across Sectors and Regions: Reducing exposure to any single area, helping to cushion against sudden swings in a particular industry or country.
Ultimately, actively managed, broadly diversified portfolios offer an accessible route for investors who prefer to let experts make the allocation and diversification decisions, so they can focus their energy elsewhere.
Professionally Managed Portfolio Solutions
When it comes to aligning your investments with your unique goals—whether that’s generating consistent income, achieving broad diversification, or taking a hands-on approach with personalized indexing—there are thoughtfully managed portfolios designed to fit the bill.
Equity Income Strategies
Looking for an income stream from your investments? Dividend-focused portfolios specialize in companies that have a solid history of paying reliable dividends. These strategies can offer a steadier flow of income, ideal for those seeking some predictability from their equity holdings.
Fixed Income Solutions
If your priority is stability and regular income, professionally managed bond portfolios may suit your needs. These portfolios typically blend various types of bonds—ranging from government to corporate and beyond—to help balance risk, enhance diversification, and create a consistent income stream.
Broad Diversification Approaches
Many managed portfolios take diversification to the next level by combining a wide range of mutual funds or exchange-traded funds (ETFs). Some incorporate both domestic and international holdings, as well as exposure to different asset classes and market factors. This can help cushion your portfolio against the unpredictable ups and downs of any one market segment.
Personalized Direct Indexing
For investors seeking a more tailored experience, separately managed accounts offering personalized indexing have gained momentum. These portfolios allow you to own the underlying individual securities of an index and customize your holdings according to your values, tax situation, or sector preferences, often with the potential benefit of ongoing tax-loss harvesting.
Access to Third-Party Expertise
If you wish to cast your net even wider, some platforms offer selection among portfolios managed by third-party asset managers—covering a range of investment styles, strategies, and risk profiles. This flexibility can be especially valuable when tailoring your investment approach to specific objectives or preferences.
Ultimately, whether you’re aiming for income, growth, preservation, or personalization, professionally managed portfolios can serve as powerful tools in building resilience and clarity into your investment plan.