In his latest CIO Weekly Perspectives article, Neuberger Berman chief investment officer Erik Knutzen said that portfolio diversification is the only defence against market crashes.
“In our view, the best lesson to take from 1987, 1997 and 2007 is that complacency and overconfidence in anyone’s ability to predict what will happen over the next week, month or year should be abandoned,” Mr Knutzen wrote.
He added that few people in the past were able to predict financial market crashes before they happened, and that this year would be “no different” if escalating tensions between the US and North Korea spark another market crash.
“Should the dangerous rhetoric of the last week escalate into something more serious, historians will note that investors didn’t see this coming, either.”
In order to adequately prepare for potential changes in the market, Mr Knutzen referred to a previous article, in which he advised: “be prepared”.
“If everything in your portfolio is in the green, that may be a sign that you are not as diversified as you think. That may reflect your conviction, which is fine.
“But be careful that it is not simply an unwitting concentration of risk. When you are properly diversified, there will more than likely be line items in the red; exposures that, deep down, you hate – but which humility tells you to maintain.”
“Instead, here is a much more certain prediction based on our experience of those three momentous falls: the properly diversified portfolio is the one most likely to be intact in 2027, 2037 and 2047.”
In his article, Mr Knutzen pointed to the crashes 30, 20 and 10 years ago, writing that “the confluence of these anniversaries is apt to make investors think about the nature of market volatility”.
“What stands out is the capacity of financial markets to ignore stresses and strains for a long time before pricing them in all of a sudden.”
