Diversity is king even though a return to equities may tempt

Published on Friday 21 November 2008 18:07

IT'S more than half a century since Harry Markowitz first outlined his concept of asset allocation, but his principles of diversification still hold true today.

As the FTSE All Share index is down 36.5 per cent since the beginning of the year, it is interesting to compare the portfolio values of each of our IFA competitors. The effects of gravity cannot be denied, however the degree of loss ranges from -20 per cent to -33 per cent and it is important to note that the effects of the current downturn have been felt much less by those competitors who chose to diversify their investment recommendations across a wide range of asset classes than those who were heavily committed to equity markets.

Admittedly, the case study is looking at a ten-year time horizon and there is a need to expose the client to equities in order to achieve his long-term goals but it is also important to consider the client's appetite for risk and how he is coping with the current market volatility.

In a recent survey, a group of wealth managers were asked: "If you had free capital for long-term investment, would you be buying equities now?" An overwhelming 83 per cent answered that they would be.

While trying to time the markets (i.e buy at the bottom and sell at the top) is not recommended and almost impossible to achieve, there is a very compelling argument to invest in equities now. The bravehearts amongst us will invest immediately and accept the inevitable volatility that will occur over the next six months – the not-so-brave will drip-feed their capital into the market, in an attempt to smooth out the peaks and troughs.

Nobel-winning economist, Markowitz, now accepted as the father of modern portfolio theory, was absolutely right when he said "asset allocation is the key to portfolio construction".

• Raymond Ellis is director of Scott-Moncrieff Wealth Management