Minimize your losses in a downturn or boom

That means minimizing losses – and the best way to do this – as history proves again and again – is diversification. This means investing in different strategies within markets, but it also requires investing in multiple markets. If possible they should be relatively “uncorrelated,” i.e. less apt to move in concert with another market.


Two faces of investors: The Under-Reactor and the Over-Reactor

History shows that investors tend to under-react to information, until they don’t – then they tend to over-react. Given high worldwide levels of uncertainty and risk, investors have been very complacent, and are arguably under-reacting to the risks in today’s markets. 

To help avoid that, we suggest broad portfolios of equities, fixed income and alternatives. This can help manage risk, realizing that markets and specific investments do not always go up and losses can occur.

 

What strategies should you consider?

U.S. Equity


U.S. equity markets unexpectedly continue to achieve all-time highs, buoyed by the election of Donald Trump and a majority Republican U.S. Congress. Many are betting they will rerun the 1980s Reagan playbook, with tax cuts, decreased regulation (particularly on financials) and increased infrastructure spending – but all remains to be seen. Can equities continue to climb?

Bond Markets


Bond markets, U.S. and global, offer rates that are at or near historic lows. Payouts are low as volatility and uncertainty are on the rise. Inflation may become a near-term risk. Yet U.S. spread sectors and some emerging markets can provide significant opportunities. Unconstrained funds can deliver strong active management across fixed income products, sectors and geographies.

Emerging Markets


Even with election risks in Italy and France, Brexit looming and China’s growth rate and future contributions to the global economy uncertain, international equities can help balance a portfolio. Emerging markets (EMs) often perform quite differently from the U.S., Europe and other developed nations. But all EMs are not equal – care must be taken in choosing since many EM funds concentrate their holdings in limited companies, sectors and countries, enhancing risk.

Alternatives


While largely illiquid and built for the long-term, many alternatives can be effective diversifiers; indeed, their lack of correlation to other markets can be most attractive. Whether in the form of hedge funds, real estate, master limited partnerships, multi-asset products or even art and wine futures, alternatives can offer solid returns in exchange for less liquidity and increased risk.

Exchange Traded Funds


Passive investments, in products such as exchange traded funds (ETFs) have proven highly cost-effective for investors who want exposure to major indexes. With the advent of smart beta and other rebalancing products, opportunities for quality passive investments will continue to grow.


Keep your portfolio diverse

But since investors and investment professionals alike cannot predict the direction of any of the world’s major financial markets with any certainty, diversification across any portfolio is wise.

Varying investment choices is proven to be the best way to benefit from the markets for the long haul. The historical power of rising markets only works if investors can remain in the game.


Investment Ideas

Exchange Traded Funds


Legg Mason US Diversified Core ETF (UDBI)

Exchange Traded Funds


Legg Mason Developed ex-US Diversified Core ETF (DDBI)

Exchange Traded Funds


Legg Mason Emerging Markets Diversified Core ETF (EDBI)


Related Literature

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Learning from the Lessons of TIME Brochure

Uses covers from TIME Magazine from the past four decades to illustrate that although today's economic worries may feel like something new, a look back at history shows that they are not unprecedented...and that bear markets don't last forever.

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Invest for Life - A Road Map for Your Financial Future

Reinforces the value of having a comprehensive investment strategy specifically designed to fit your goals.

Investor Guide

Diversification By Design

QS Investors’ Diversification Based Investing (DBI, QS DBI ™) takes a macro approach to building portfolios and balancing risk to deliver broad market exposure that can complement core portfolios.

IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.