SANCTUM WEALTH MANAGEMENT: THE COST OF RISK AVERSION

Investment Outlook , Published Jan 18, 2018

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The opportunity cost of choosing risk aversion – investing in FDs for instance – has been high over the past two decades. Staying invested is clearly the right choice. Time and again investors have chosen risk aversion, and the opportunity costs have been large.

A review of asset allocation principles is appropriate. Asset allocation should include both strategic and tactical elements. Strategic asset mix addresses the blend of the major asset classes offering the risk/return tradeoff best suited to an investors profile. It can be considered to be the benchmark investment plan that anchors a portfolio thorugh many investment and business cycles, independent of near term view of propects for the economy and related expectations for capital markets. Tactical asset allocation refers to fine tuning around the strategic setting in an effort to add value by taking advantage of shorter term fluctuations in markets.

Play more defense now so you can play more offense later. Seek growth and protect. Be prepared to significantly overweight equities when the opportunity presents itself. We think 2018 will be the year for incrementally defensive investing , which we define as staying invested, but using tactical strategies to stay protected. On the back of a good year in equities, principal protection makes sense.

Reduce equity allocations and keep some money in cash or short term debt
Reduce the risk profile and valuation multiple of investment portfolios
Consider hedging via principal or selective protection
Within equities, move to specialized managers that are focused on focused strategies
Protect portfolios. When the masses are greedy, forward returns are usually lacklustre.
The market is smarter, faster, and greedier today than we’ve seen in years. Fundamentals are better today globally than at any time since the great recession.
As long as an investors is in a financial situation where they can cope with a correction, then the right thing is to stay invested.
Avoid becoming overly aggressive
The easiest answer, obviously, should the market sell off, is to buy more.