Today’s financial markets are fast-moving and extremely volatile. The most influential market participants are no longer staid long term investors like life companies but highly geared hedge funds that change their asset allocation at a flick of a switch. The markets are also increasingly inter-dependent to the extent that we have the situation where a series of defaults on mortgages by Americans with low credit ratings led to the first run on a bank in the UK for 141 years.
Over the last year investors in areas as diverse as mining companies, crude oil, wheat and emerging stock markets like China have thrived, while investors in the more restricted sphere of shares in UK banks, property companies and retailers have had a tough time. The lesson here is straightforward. Investors who have diversified into a broad range of asset classes can mitigate falls in property values and share prices relating to the specific difficulties of the British economy.
Moreover it is increasingly important for investors to be able to adjust their asset allocation speedily as events unfold. Sooner or later a boom in an asset, e.g. Irish property or Chinese equities may burst and value will be found elsewhere. But when it becomes apparent that an asset bubble is close to bursting, there is a need to act quickly, otherwise you may not get out in time…
The message for the future is therefore to look for investment vehicles that are not only nimble but also offer a broad range of asset classes, which fit the bill in this new era where markets are fast-moving and extremely volatile.