Over the past quarter we have seen markets rise significantly, inflation is at a three-year low and interest rates remain non-existent, all leading some to suggest that a higher allocation to equities is warranted.

Hmm, don’t we remember a similar situation back in the late 90s which then led on to a significant drop in the market, and the burst bubble of 2001/2?  There are those that say that current markets are not the same as then.  Really?

Comparing markets now with then does reveal some differences.  One is that there is not as much hype and justification now around those share prices not underpinned by hard facts. 

However, there is one aspect of the current market which is very similar to the 90s - volatility is back, and this time more so than before.

Just looking at the last few weeks we see it rearing its ugly head, with markets dropping as a result of two events, the unfortunate and tragic events in Boston, and, on the same day, Cyprus selling its gold reserves.  Markets were off by nearly 2% then returned towards the end of the week. 

So what does this mean for our long-term investment strategies?

As we see it you have two options, one, you stick to your long-term investment strategy and do not waver (though you’ll need nerves of steel as there is likely to be a correction in the next seven to ten years).  Or two, you keep your long-term investment strategy as your ultimate goal but also actively manage your asset allocation tactically through this period. 

By actively managing the asset allocation we do not mean changing it every quarter, but reviewing it along with your investment manager, and adjusting for the market conditions. It is also well worth considering how to weather the storm when it does happen!

So what is the answer to volatility? 

It really does come back to asset allocation, and being prepared to reduce the amount of potential performance in exchange for less of a rollercoaster ride! 

One way to do this is by reducing your equity allocation in a rising market.  Another is being prepared to act quickly to make changes to the asset allocation as events unfold.  Personally, I think it’s easier to reduce now take to take some heat out of a portfolio than to guess when to make dramatic changes.

One thing that is sure however, is that active monitoring of a portfolio is now more than necessary then ever, to ensure that active management can occur! 

Next time a reminder from Aesop’s.

Article by Mark Freeman