Journal to portfolio afterlife

[portfolioafterlife]

Given what we know from the research of such pioneers as Brinson et al., that the majority of the variation in returns between portfolios is explicable by the mix of underlying assets which they contain, basing return assumptions on the underlying asset returns seems like a sound approach to me.

Although it may seem counter-intuitive, reducing the exposure to ‘risky’ assets such as equities in favour of ‘less risky’ fixed interest investments can have the effect of increasing the risk of failure, even if it may reduce the portfolio’s volatility.

The volatility of a particular asset or asset class also fails to allow for the fact that a well constructed portfolio comprises multiple assets whose return patterns should be at least partially uncorrelated with each other. Holding two uncorrelated but volatile assets can result in a less volatile overall portfolio if the ups of one cancel out the downs of the other.
It is also worth remembering that since volatility is a measure of the variation in returns over time, it is prone to changing as those underlying returns change. Similarly, the correlations between assets are also not constant and as history reminds us frequently, they often increase in times of market stress. A further point is that large movements can occur more frequently than predictions suggest and but they are not evenly distributed between positive and negative; instead there are often more large negative movements than positive ones.

Why volatility isn’t the risk which should worry you - The Financial Bodyguard Blog Site

I recently read a consultation document regarding proposed changes to the way in which projections for money purchase pension schemes are calculated.

thefinancialbodyguard.com

 

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The Survival Instinct of Money - More To That

The more money you have, the more you have to preserve. And the more you have to preserve, the more fear that surrounds its potential loss.

moretothat.com

 

[portfolioafterlife]

L ’assalto russo a Luhansk – Reportage dal Donbass in fiamme – Analisi Difesa

www.analisidifesa.it

 

[portfolioafterlife]

In the mid-1960s, as prices rose, the Fed belatedly shifted into inflation-fighting mode by rapidly raising interest rates. The move eventually led to an economic recession and a period of negative returns for stocks and bonds. Bonds were able to provide a hedge to equities eventually, but only after the Fed had sufficiently snuffed out inflation.
The key lesson: Bonds may be a reliable diversifier when economic growth is slowing - but not necessarily when inflation is increasing. Why? Because when stocks decline due to rising inflation concerns, the Fed may simultaneously have to raise interest rates to slow inflation. In the end, bonds may lose out as well, potentially exacerbating losses in a diversified 60/40 portfolio.

Rebuilding Resilience In 60/40 Portfolios

When growth assets, like stocks, sell off due to economic slowdowns, safer assets like bonds appreciate as investors seek stability. Click here to know more...

seekingalpha.com

 

[portfolioafterlife]

In a bear market it can be impossible to escape the pervasive negativity. Not only will our portfolios be falling in value, but there is likely to be an incessant flow of news highlighting the harsh realities of the prevailing backdrop. Dealing with this is not just an uncomfortable experience, it changes how and why we make investment decisions.

There are three critical elements of the hypothesis that are relevant for investors and the emotional strains of bear markets:
1) The strength of our feelings is closely linked with vividness – the more powerful and salient the images and stories are, the greater our emotional response will be.
2) Our fear will increase markedly as we approach “the moment of truth”. There will be no comparison between how we feel about knowing there will be a bear market in the next ten years and being in one right now. We are likely to hugely understate how much emotion will impact us prior to actually experiencing such a negative scenario. Bear markets are easy to navigate on paper.
3) The feeling of fear and a heightened sense of risk will be amplified by the behaviour of other people. Anxiety and panic in others will create a damaging, self-reinforcing feedback loop.

As with most heuristic or instinctive decisions, it is easy to see its underlying usefulness. Acting rapidly to respond to strong emotional cues (particularly related to danger) is clearly an effective adaption in many instances, yet one that inevitably undermines our ability to withstand periods of market tumult or invest for the long-term.

Although investors are not renowned for their consistent use of probabilities, strong emotions can make this problem significantly worse.

As we are currently experiencing a challenging market environment, now is not the ideal time to plan for how we might cope with one in the future. So, what can we do now to ward off the dangers of emotion-laden decision making?

There are two key behavioural actions. First, is to remove ourselves from emotional stimulus – turn off financial market news and check our portfolios less frequently. Long-term investors should stop doing anything that provokes a short-term emotional response. Second, we should never make in-the-moment investment decisions, as these are likely to be driven by how we feel at that specific point in time. We should always step away and hold off from making a decision, and reflect on it outside of the hot state we might find ourselves in.

Bear Markets Are a Test of Investor Emotions

In a bear market it can be impossible to escape the pervasive negativity. Not only will our portfolios be falling in value, but there is likely to be an incessant flow of news highlighting the…

behaviouralinvestment.com

 

[portfolioafterlife]

Se la storia dovesse ripetersi sono pronto.

 

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