Founder's Corner: Asset Allocation in a Bull Market - Strategies for 2018 and Beyond
From the Desk of John P. Calamos, Sr. - Founder, Chairman and Global CIO
In 2017, stocks soared, passing milestone after milestone. There’s been very little in the way of downside volatility or corrections. As headlines focus on an improving economy and stock market records, many investors are asking if they should invest more in stocks. Even more risk-conscious investors are wondering if they should shift to aggressive strategies—including cryptocurrencies!
In times like these, it’s easy to forget about downside and bubbles. But it is important to remember that volatility and corrections are normal, including during bull markets. The chart below shows that a correction in the markets is long overdue. To be clear, I believe the stock market will continue to advance—tax reform and fiscal reform can give a boost to the U.S. economy, and the global economy is also in good shape. There just may be a pause or two along the way. A well-thought out asset allocation strategy can go a long way in navigating the different crosscurrents I expect in the coming year.
Trading days since a 5% Downturn
Source: Goldman Sachs Global Investment Research, “Where to Invest Now: Up, up and away,” January 2018. As of January 4, 2018.
So, how should investors position their portfolios heading into 2018? It may come as a surprise, but my advice to investors is the same in up markets as in down markets:
1. Stick with an asset allocation based on your long-term risk tolerance. Over the long term, assets with higher return potential are likely to demonstrate increased volatility, and it’s important to remember both sides of the equation. Some people could stomach a decline of 15% in a year, others are anxious about a decline of 5%, and some are even more risk averse.
Your asset allocation should consider both upside and downside potential. In other words, don’t think just about the boat you want to buy, think about the monthly payments. Don’t think about how much you’d like to retire early, think about how you’d feel if you had to work a few years longer than you intended.
2. Don’t time the markets. One of the underlying assumptions of asset allocation is that market cycles will be difficult to predict. One goal of asset allocation is to have your risk posture well defined and your asset allocation in place before unforeseen events occur. Changing your risk posture too often is called “market timing” and it’s not a good strategy. It’s very difficult to consistently time the tops and bottoms of the market correctly. Far too often, people catch the downturns but miss the upturns in the market.
3. Take a long-term view of market volatility and corrections. It’s very unusual that volatility has been so low and that the market has gone so long without a correction. As I noted, volatility and corrections are normal, including during bull markets. What I’ve seen over the past 40-plus years is that these corrections can provide buying opportunities for long-term investors.
4. Diversify to reflect your risk tolerance. Investing in different asset classes can help smooth out the overall performance of your portfolio. More conservative investors may benefit from having increased allocations to fixed income investments, which have often been less volatile than stocks. Diversification can also help you pursue multiple goals. For example, a combination of fixed income and stocks can help you pursue income and capital appreciation.
5. Think globally. Through the decades, global investing has become an increasingly important element of successful asset allocation. U.S.-centric portfolios can miss out on considerable opportunities. Now more than ever, global allocations are essential for most clients, given the interrelationships between the economies in the developed world and the future opportunities within the emerging markets. Of course, the degree of participation depends very much on your individual needs and risk tolerance.
6. Don’t limit an asset allocation to stocks and bonds. There are other asset classes that can provide enhanced tools for managing risk and return. For instance, convertible securities offer unique benefits through their hybrid stock and bond characteristics. At Calamos, we’ve been using convertible securities since the 1970s to help investors participate in stock market upside with potential less downside.
Depending on your risk assessment and personal goals, it may make sense to include alternative strategies. At Calamos, we are proud to have been a pioneer in alternative strategies, and today draw on decades of proprietary experience. Alternative strategies can enhance diversification and capital appreciation potential, and also provide additional tools to manage risk.
Once primarily utilized by institutions, alternative strategies are becoming increasingly popular among individual investors. There’s a good deal of variation among alternatives, so it’s important to select tested strategies that align with your risk posture.
7. Measure your performance based on the progress you are making toward your goals. Many times, people compare the performance of their asset allocation to a broad index benchmark—and often, the one that is leading the market over the near term! In my experience, that’s not the best approach. Instead, I encourage investors to focus on whether they are moving toward their goals, in a way that aligns with their risk posture. For example, investors with well-diversified portfolios shouldn’t compare their performance to an all-stock benchmark.
8. Review your asset allocation regularly. Although you should take a long-term approach to your asset allocation, it’s important to remember that your risk assessment can change over time. Personal events may trigger the need to review your long term goals and your risk assessment. Be sure to schedule regular check-ins to ensure that your risk posture is consistent with long term objectives.
Every investor is different. Guided by a experienced and risk-conscious approach to asset allocation, Calamos Wealth Management can provide you with personalized information about asset allocation.