“Investment strategies must evolve to accommodate complex modern markets,” says David Giunta, president and CEO of Natixis Global Asset Management – U.S. Distribution, creators of Durable Portfolio Construction, an investment philosophy that draws on a variety of asset classes in an effort to produce reasonable returns and avoid dramatic losses. “The ultimate goal is to pursue returns in a way that carefully considers the risks.” According to Giunta, there are five pillars of smart investing that can help limit risk caused by unexpected market swings and position portfolios for consistent long-term returns. These are the founding principles of durable portfolio construction:
1. Put risk first
Rather than first considering the potential rewards of an investment, start by making risk your top priority. Ask yourself how much you are willing to risk and base your investment decisions on this principle. When you understand risk and what to expect, you’ll be better positioned to weather difficult market conditions.
2. Maximize diversification
Diversification creates a solid foundation for building a more durable portfolio. Think of the simple adage we’ve heard since childhood: “Don’t put all your eggs in one basket.” It can make a lot of sense for investors. If you include a wide range of asset classes in your portfolio, then you will be better prepared to handle the challenges that modern markets can present. When one type of investment is down, the losses may be offset by the potential gains in another. Overall it’s an approach that may provide a more consistent performance in all kinds of markets.
3. Use alternatives
When diversifying your portfolio, you may want to investigate alternative investments. Since markets around the globe often have high correlations – that is, they move up and down in synch with each other – it’s important to look for investments with low or no correlation to the broad markets. Keep in mind that some alternative investment techniques can amplify a gain or loss.
4. Make smarter use of traditional asset classes
Investors have often looked to stocks for growth and bonds for stability, but these two asset classes can play other roles in a portfolio. Equities have historically delivered growth that has outpaced inflation, but they can be volatile. Bonds, on the other hand, may not always be stable and can be volatile in periods of rising interest rates. Multisector bond funds may help address these concerns by diversifying bond holdings to include those that may be less interest rate sensitive and more focused on total return. However, keep in mind that multisector bond funds include a variety of fixed-income assets which may not always complement each other or provide the investment results desired.
5. Be consistent
In today’s world, there can be a lot of noise that may distract you from the big picture. That’s why staying consistent is one of the best things you can do for yourself as an investor. Setting your investment plan and sticking with it through market fluctuations can help you weather the storms and pursue your goals. To learn more, visit www.durableportfolios.com.
“It’s only human to watch the markets go up and down and want to react, but you shouldn’t let short-term market movements distract you from your long-term goals, ” says Giunta. “These five principles will help investors create a strategy that is timeless, and one that will accommodate the realities of today’s global markets.”