Mixing and matching – doing it right amid market turmoil

Linda Sherlock, Executive: Wealth and Business Development at PPS Advisory Services and Enablement

We all know we should investment money – especially for later in life when we retire. But where does one even start? How does one “mix and match” asset classes amid an extremely volatile economic environment to ensure one’s investment portfolio weathers all kinds of market turmoil? 

We are already past the mid-year point for 2022, it has certainly been a roller coaster cycle when it comes to markets and investments this year and prove to be a challenge for individuals and portfolio managers deciding in which assets to invest.

The adage of “investing is not a short game” and being invested through cycles of both bull (growth) and bear (decline) are well-known to most investors. However, emotion frequently takes over the rational thinking and decision making at times like these. Understanding the methodology behind how managers select funds, manage asset allocation and mitigate risk is fundamental in ensuring that investors are well-placed to navigate even the most turbulent cycles.

When it comes to managing one’s portfolio, asset allocation is a key lever impacting both risk and returns in a portfolio. Empirical studies have shown that each asset class performs and correlates relative to each other. Traditionally these asset classes are cash, bonds, property and equity (shares). Overlay these in both a local and global holding and you have further impact on moves in the local currency. 

Asset allocation is, therefore, a selection of the right mix of these asset classes with the intention to minimise investment risks and maximise growth potential or enhance returns. 

This is done using two common approaches to asset allocation – strategic asset allocation (SAA) which is long-term focus and tactical asset allocation (TAA) which aims to take advantage of shorter-term opportunities and investment strategies. Shorter-term being a 12 to 18-month view.

Asset managers have different styles, approaches and philosophies each of which will behave differently in different market cycles. 

Diversification is a frequently discussed element of investing and having reflected on asset managers’ differences, the ability to have a portfolio that is diversified across different asset managers as well as asset classes is a fundamental tenet of the multi-manager investment strategy.

As an investor, you have a desired outcome or goal and time horizon for each of your investments. The financial planning process identifies and determines an appropriate investment solution to meet both these and your risk appetite.

This technical and complex work is done by multi-manager portfolio managers on behalf of you as an investor, applying a consistent and thorough investment process on an ongoing basis including recalibration at points in time.

As an individual investor, the complexity of selecting a portfolio that meets all your objectives, while being maintained on an ongoing basis on your behalf is best met through multi-manager portfolios.

That is because portfolios that are built on multimanager methodology add value by selecting and blending asset managers, as well as determining the suitable asset allocation to meet the desired investment outcomes or objectives of your portfolio. 

The aim of manager selection is not to predict which managers are going to perform best in the immediate future but to invest with a combination of high-quality and experienced managers that will deliver a competitive return within an acceptable risk framework regardless of the economic environment. 

Yes, this sounds complicated, but your financial planner will guide, advise and ultimately recommend the correct portfolio for your outcomes, while ensuring the review of your investment is taking place regularly to adjust should any changes occur in your circumstances.

At PPS Wealth Advisory we subscribe to multi-manager portfolio management bringing the necessary diversification, risk mitigation, asset allocation and asset manager blend to our members that within different cycles are best placed to meet our member outcomes and long-term performance. We believe this approach, combined with a long-term investment mindset puts members in a strong position to avoid the pitfalls of investing and achieve their return objectives over their investment horizons.

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