Making the most of diversification
Guest blog: Mike Brooks, Head of Diversified Multi-Asset, Aberdeen Asset Managers Limited
The bond bull market has supported returns from traditional balanced portfolios over the past 30 years. But with bond yields at extremely low levels the bull market could well be coming to an end, meaning this tailwind could transform into a headwind in the coming years.
The problem this presents is not insurmountable, however. Diversification can moderate the negative effects of a bond bear market.
Diversify, but do it effectively
It’s said that you can’t teach an old dog new tricks, and the same applies to many investors who have become set in their ways and closed to new ideas. On the other hand, some are all too ready to jump on the latest bandwagon without performing adequate analysis.
The successful investor must navigate a sensible path between these extremes. In an investment universe that is constantly changing, some of the most fruitful investments are those that initially appear to be “outside the box”.
Adopt a long-term view
Many investors judge a manager based on their recent performance. This can be misleading: Successive academic studies have shown that a focus on short-term performance often leads to investors firing managers with poor recent performance and hiring those with good recent performance. The net effect is a significant escalation of transaction costs – unaccompanied by an improvement in subsequent performance. The lesson? Focusing on short-term performance may be bad for your wealth!
Personally, I find a diversified approach helps keeps most of my biases at bay. It helps me avoid the temptation to bet heavily on my favoured investments, with the subsequent regret when things go wrong. It also gives me a greater ability to think clearly and pick up bargains in times of market stress.
Read more about our multi-asset approach here
The value of investments and the income from them can go down as well as up and you may get back less than the amount invested.
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