Active Management and Diversification
High rates of inflation, bear markets, an energy crisis, geopolitical conflict, rising interest rates – the outlook has been anything but ideal for financial markets, and with the UK’s deepening political and economic crisis, things may be on rocky ground for some more time.
It’s at times like this that investors tend to step back and take a more passive approach in order to lower their exposure to risk. However, experienced fund managers know that this is when you step in and actively manage portfolios, diversifying them to strategically offset losses with gains. The additional fees money managers levy on active management pays back many times in terms of returns, stability and protection in a volatile market.
Financial markets move up and down all the time, but when those moves are bigger than usual, steep and frequent, the market is said to be volatile. The unpredictability tends to be higher when the market is moving lower. This is what makes investors panic and take the ostrich defence – burying their head in the sand and hoping everything goes away.
At Finsbury associates, we always tell our clients that staying calm and adopting an active, balanced and holistic view are how they can stay one step ahead of the market and protect their money through times of crisis.
Importance of a diversified portfolio
The primary goal behind diversifying your investments is to mitigate risk and protect your wealth.
It is extremely rare when every single asset class is crashing or generating loss. Period of loss for one are typically times of gain for others. Investing in different asset classes like equities, real estate, credit, government bonds, and cash means that even if a few of them are in a phase of loss, the gains from others will balance out your capital investments.
Narrowing down your investments puts you at a much greater risk of losing a substantial amount of your capital. For instance, let’s say you have invested heavily, and almost exclusively in tech-based stocks. Rapidly rising interest rates will have a massive impact on the valuation of these companies, bringing the value of your portfolio crashing down, and devaluing your capital investment in the process.
Different asset classes tend to perform differently at various times. So, if you have invested in gold-backed bonds and equities or other currently well-performing asset classes alongside tech-based stocks, the gains from the former will balance out the losses from the latter, leaving the value of your portfolio largely untouched – if not profitable.
Active Management and Diversification
In an unpredictable financial environment, actively managed funds and portfolios have a definite advantage.
Active management means that a portfolio or fund manager and their team of seasoned investment experts continuously reviewing and making decisions on the fund or capital amount. This is the reason why active management comes at an extra fee – because the success of this approach depends on in-depth market research, the team’s expertise, and their experience and success with managing challenging markets.
These professional money managers buy and sell assets on your behalf. With an eye on the pulse of the market, having active management for your portfolio enables it to respond intelligently to fluctuations and market forecasts.
This is why active management is a worthwhile investment during economic and political volatility.
At Finsbury Associates, our investment strategy is to build a diversified portfolio with the core-and-satellite approach. This is widely considered one of the best and most effective ways to grow the value of a portfolio over the long-term, keeping investments fairly stable through ups and downs, no matter how steep. The core-and-satellite approach builds portfolios with a core investment, complemented by satellite investments.
This inherently diversifies your interests and is a tried-and-tested way to earn higher returns while lowering risk. Your money goes into ETFs, multi-asset funds and other alternatives, spreading out your risk and ensuring consistent returns. It is a great strategy for those who want to build wealth over time, and is one of the most reliable ways to invest your money.
Get in touch with us and talk to one of our experts about whether this strategy can help you grow your wealth and meet your financial goals.