Tuesday, October 25, 2011

Study: Investors should adapt to manage volatility

Investors in today's volatile markets need to be more flexible, dynamic and global-minded, according to a new study from Bank of America Merrill Lynch and political consulting firm Eurasia Group Ltd.

In "The Great Global Shift: New World, New Rules," the firms discuss new investment approaches they say can help investors navigate unpredictable global markets - and capitalize on new opportunities.

In the wake of the 2008 financial crisis, for instance, developed countries are turning inward to fix infrastructure and financial problems, while emerging countries are showing promise for continued growth, the report says. As a result, investors can get ahead of the curve by looking at a group of countries, rather than just the U.S., when considering how to allocate their assets.

Lisa Shalett, Merrill Lynch Wealth Management's chief investment officer, said during a conference call today that investors should keep three things in mind as they build their portfolios in an increasingly volatile global environment:

  • Portfolios should be more global. Instead of focusing solely on the U.S., investors should be open to investments in places such as Turkey, Indonesia and Brazil. "What we're talking about is really opening your mind to where all the growth in the world is," she said. "It's asking ourselves the question, is what we once believed was safe truly safe? And is what we believed was risky really risky?"
  • Investors should be more flexible. Consider emerging-market sovereign bonds and high-yield bonds instead of solely U.S. Treasury bonds and municipal bonds, for instance.
  • Investors need to be more dynamic. In a volatile environment, portfolios can quickly drift away from a preferred investment strategy - so instead of re-evaluating their portfolio once a year, investors should consider working with an advisor two to three times a year. "You can't set it and forget it," Shalett said.
As investors consider those changes, they should still hold tight to their core principles, such as sticking with an investment strategy and diversifying their portfolios, she said. But she urged them to think outside of the box when it comes to what strategy they employ and what diversification really means.

"It's a connection between all the talk," Shalett said. "The world is different, but let's not be stuck in fear. ... Let's understand that environment and take some action to get to the outcomes we want to achieve."