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Ways to withstand and exploit market volatility in private investor portfolios

7 December 2016

Ways to withstand and exploit market volatility in private investor portfolios

How concerned should private investors be about on-going market volatility? After all, the Brexit and Trump votes and the Italian referendum not only caused immediate turmoil in global stockmarkets, they set the stage for uncertainty well into next year and even beyond. As conditions become more challenging, investors will want to review their portfolio make-up as a matter of priority to ensure they are well-balanced and resilient.

The good news is that, as they do so, there are several ways they can mitigate risk and even take advantage of the current climate as they make decisions around asset allocation going forward. So what strategies should they be considering?

Firstly, taking a short and longer-term approach is important in a well-balanced, diversified portfolio. By holding assets with a range of time-frames, for instance by including private equity (which typically has around a five year investment horizon) alongside more liquid assets such as quoted equities, investors can reduce the risk of over-reliance on more volatile shorter-term investments.

Extending this idea further, investors could look at investing in uncorrelated assets as a further hedge against the short term impact of turbulence in public markets. By this, I mean assets whose value will not be affected by swings in more mainstream asset classes such as equities or bonds. Take third party litigation funding for instance: here, returns come from the outcome of cases resolved by the courts, and are therefore unconnected to mainstream market movements.

While investors should have a robust core strategy, that doesn’t mean they shouldn’t be opportunistic. After all, there are ways to exploit market volatility – for instance through exposure to funds which seek to benefit from trading both long and short positions or by investing in distressed assets as default rates rise.

It shouldn’t be forgotten, however, that investments should always be underpinned by a disciplined approach. Even in areas where strong demand is fuelling rising prices, investors need to be very careful not to overpay for assets. It’s essential to consider how assets might perform over the whole market cycle and what impact changes like rising interest rates might have on risk.

Of course, there are reasons why these kinds of innovative alternatives to more traditional assets are not more mainstream – one is risk (they’re not for everyone) and the other is access. But for private investors with the right risk appetite, the barriers to entry are coming down, meaning that individuals now have more scope than ever to diversify.

As private investors navigate today’s more volatile market environment, re-assessing whether their portfolio composition still meets their long-term investment goals is essential. Finding ways to build resilience into a portfolio but also add value to it are critical considerations. For all its challenges this could be an exciting time for investors to branch out.

By Emma Bewley, Head of Funds at Connection Capital LLP

 Russell O'Connor
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