Consensus appears to be that markets are in ‘melt up’ mode as artificially low interest rates and lack of yield elsewhere help to assuage any concerns about the economic recovery and rising inflation. It is particularly at such times that investors should ensure portfolios are adequately diversified relative to risk profiles in order to protect against setbacks. Yet, while acknowledging individual circumstances, there is little consensus as to how this should be best achieved – particularly as a new market regime unfolds. The good news is that sound asset allocation can still produce good risk-adjusted returns.
The theory
Diversification is an important investment discipline which is sometimes overlooked until it is too late. When starting an investment journey, it makes sense to focus on equities – they have performed better than most other assets over the long-term. But as time passes investors should increasingly be looking to protect past gains, particularly if financial goals are approaching, for market corrections can be cruel in their timing and devastating in their effect.