Dealing With Investor Uncertainty

A broadly diversified portfolio with an appropriate target asset allocation for an investor’s circumstances is a straightforward and disciplined way to deal with uncertainty about where to invest in today’s unquestionably challenging investment environment.

This enables investors to spread their risks and their opportunities throughout different market conditions – rather than trying to pick future winners or trying to "time" the markets (attempting to pick the best times to buy or sell assets).

Successive research has concluded that a diversified portfolio’s strategic asset allocation – the proportions of its total assets invested in different asset classes – is responsible for the vast majority of its return over time. (See The global case for strategic asset allocation, published by Vanguard, July 2012.)

An appropriate strategic or target asset allocation takes into account each investor’s risk tolerance, time horizon and financial goals.

And a disciplined investment approach involves periodically rebalancing a portfolio so its risk/return characteristics remain consistent with its strategic asset allocation. Rebalancing is particularly critical after different markets have moved sharply up or down.

As Smart Investing recently discussed in The investor’s lament, investors seeking a diversified portfolio can choose to invest in a simple diversified investment fund. These funds are designed to reflect an investor’s tolerance to risk with typical choices of conservative, balanced, growth and high growth portfolios.

Of course, many investors create their own diversified portfolios by investing in a series of sector-specific funds.

Exchange Traded Funds (ETFs) or traditional index funds tracking broad market indices can provide a straightforward and low-cost way to diversify a portfolio.

Investors can use ETFs, for instance, to gain exposure to such markets as Australian shares and international shares, emerging markets, fixed interest and property securities.

Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia.

As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.

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