Many market participants are reacting to recent volatility and market dislocations with increased fear, leading to poor investment decisions, says State Street Global Advisors (SSgA).
A new SSgA report titled I Bet You Weren’t Expecting That? argued that investors need to be prepared for market movements in the effort to protect against market vagaries.
“What we do know is that such increased uncertainty and market dislocations invoke fear in many market participants.
“The natural instinct is to react to this fear, often without duly considering all the options and possible outcomes, and this may lead to poor decisions,” the report said.
SSgA said investors need to be prepared for market movements rather than respond to them.
“We believe that the key is being prepared for, rather than responding to, increases in market risk and building a portfolio that aligns with your own investment objectives over an appropriate horizon,” the report stated.
In an additional report, Hope for the best, prepare for the worst, SSgA said investors must include a total risk objective when constructing equity portfolios.
Report authors, SSgA senior portfolio manager Chee Ooi and portfolio strategist Anthony Golowenko, pointed out that investors should only hold assets that meet the portfolio risk and return objectives.
Mr Ooi and Mr Golowenko also said investors need to estimate total portfolio risk rather than focus on tracking errors.
“Rather than being concerned about the tracking error contribution of securities NOT held in the portfolio (such as Apple, some large American Banks, et cetera), we care about the total risks of the securities that are in the portfolio,” the authors said.
Mr Ooi and Mr Golowenko noted that if concerns about index-relative risk were taken up, SSgA would have had a greater holding in financials and consumer discretionary stocks, which would have led to lower portfolio performance.