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August 25, 2009 at 08:00 PM
After the dizzying investment ride we’ve been on for the last year and a half, it’s only normal to wonder where we go from here. The reality, of course, is that no one knows for sure. We never really do, at least in the short run. And that’s one of great takeaways from this tumultuous period.
We’d like to think another big lesson might be the importance of managing risk. Investors who’ve allowed emotions to influence their decisions across this tough stretch of market volatility have paid dearly through their portfolios. And that’s because loss of objectivity almost always leads to susceptibility toward the market’s swings–both ways–as stocks and sectors shift quickly between leader and laggard. Check out the financial sector across the last 18 months for a good example.
One way skilled investors mitigate the impact of emotion on their decision-making is through disciplined portfolio rebalancing. In its simplest form, rebalancing is regularly returning a portfolio to a proper mix of stocks, bonds, and cash when they no longer conform to a plan. But rebalancing can and should be a lot more robust than just selling high and buying low…we think it’s an outstanding opportunity to add or increase exposure to overlooked asset classes at the same time. And we think one such space right now is international small-cap equity.
Often confused with emerging markets, international small-cap equities tend to be a neglected space within the context of a well-diversified portfolio. And that’s unfortunate. In unhedged portfolios, international small caps not only provide exposure to foreign currency, they also offer an opportunity to buy companies that are more sensitive to domestic demand than global economic trends. It’s hard to argue the logic of the class as a diversifier.
