In a market environment marked by large price swings in a mostly sideways pattern, diversified investors have a big advantage. Well-diversified portfolios, especially those positioned with extra conservatism, should participate less forcefully in drawdowns affecting risky assets like those we observed in Q1. We believe portfolios like these may benefit from a selective and opportunistic increase in equity exposure, with the goal of participating a little more forcefully in what we expect to be, at least temporarily, an improved environment for taking risk. The combination of milder downside capture and stronger upside capture holds the key to avoiding an investment result no better than “all that fun for nothing.”
Jeffrey Knight, CFA, is global head of investment solutions and asset allocation at Columbia Threadneedle Investments.