Dynamic thinking for volatile markets

August 26, 2015

The current volatility afflicting global share markets again highlights the perils of a ‘set and forget’ investment strategy. The theory of strategic asset allocation (SAA) is fundamental to constructing a diverse and suitable investment portfolio and despite some shortcomings, can ensure an investor’s expectations and risk tolerance are met at implementation. But a target or set asset allocation by definition implies that information and expectations remain static, which is far removed from the global environment where market dynamics are constantly changing and short-term concerns can dominate news headlines and market sentiment.

Dynamic asset allocation (DAA) describes the process that aims to produce additional portfolio returns or reduce risk, by reallocating capital when short term events dislocate market pricing away from ‘fair value’. Due to the long-term nature of SAA it is not well equipped to respond to these market events. DAA introduces a flexible structure that allows increased exposure to under-valued assets while decreasing exposure to overvalued or vulnerable assets.

We believe that in the existing economic environment of low growth, low interest rates and expected low returns, the shorter-term cycles are becoming critically important. Identifying and capitalising on opportunities during market swings is now fundamental to creating enhanced returns. A disciplined DAA allows new information to be incorporated into the investment process producing more efficient portfolios, less volatility and reduced risk. By adapting and reweighting investment exposure, dynamic asset allocation increases the probability of achieving higher returns and promotes better risk management.

This is general advice only and you should not act on it without consulting your financial adviser. Call us on 03 9859 7899 if you would like advice particular to your own financial circumstances.