Preserving Wealth Against Higher Volatility

Too many times, the imagination of constant behavior has led us down a path of financial ruin. The thought that housing prices will always rise or the belief that dot com companies will continue a path of infinite valuation growth, propped up bubbles that left everyone involved (directly and indirectly) in a world of hurt.

The focus of this post is on those that are indirectly involved - the pension holders, mutual fund investors,  hard working individuals wanting to secure their wealth. Often times, these people just go with the flow and fail to take full control over their investments. For example, pension schemes are designed to make gains during bull markets, and remain steady during down-times largely through the hope that people will continue paying into the system. Volatile times call for greater optimization of portfolio returns to get out of the rat race of traditional investing.

Stop being a blind investor. It's time to take charge.

Buy and Hold is a common term in portfolio management. An investor picks an asset or a basket of assets with the intention of holding on to it for a long period of time. This is a gamble. You hope that your due diligence conducted now will grant you time without worry in the future. Sometimes this works. Investors stick with major companies like WalMart and even Apple for long periods of time and make significant gains in their portfolio. However, those that actively re-balance their portfolio are one step ahead, and are more secure than the buy and hold investor.

A portfolio should be diversified by industry (or asset type) and time of investment. Investors should have a mix of assets that have various time frames associate with the trade. One might invest in Apple for two years (with periodic check-ins and adjustments), but also invest in Oil and Gas only during specific conditions such as storage reports. The former involves less transactions with a clear eye on maintaining value, whereas the latter calls for a trading approach to handle long term uncertainty with short term gains.

This is an ongoing balancing act. Simple diversity in asset classes will only go so far. Investors need to look at the snapshot scenario. If an investor is focusing on a particular market condition - say the European debt crisis, correlation between assets must be managed properly. A naive investment -- placing large bets in the US equities markets hoping that this will protect your portfolio from European exposure.The problem here is that US companies have great exposure to Europe as it is a major trading partner; better hope you're not holding financial stocks that have a balance sheet full of Greek debt.

Investors need to understand that investing in Mexico is parallel to investing in the US. Placing money in Asia does not guarantee safety from the economic woes of the West as trade and financial dependence is evident. Investing in Australia without understanding Asia can be fatal (when China demands less, Australia suffers). The bottom line is that your portfolio needs to take a constant pulse of various conditions inside and out of your asset classes.

Another naive approach is to give up and avoid the global recession by investing in Gold for the long haul and be completely blindsided to scenarios that may play out. Investors can only prop up Gold prices for so long as the demand for liquidity to cover risky positions in equities will cause periodic moments of declining Gold prices. In the long run, gradual price rises may correct this, but based on your financial position, a margin call might drain your portfolio in its entirety. Short term speculation in smaller amounts will allow investors to cash in where they see opportunity. It requires more time and awareness, but your money deserves some attention. A lazy investor receives lousy returns.

The video above is from the video bar provided by Merrill Lynch Wealth Management. The panel of experts speak to this point very well.