Diversify to defend against portfolio drawdowns
May 13, 2019
A multi-asset approach to generating income
Anwiti Bahuguna, Senior Portfolio Manager
It is getting harder to generate income from just one asset class, such as bonds. But there are various ways of garnering income across the capital spectrum.
Investing for income should not be just in bonds or in stocks. There are multiple sources of income. A well-diversified portfolio should take advantage of all the possible ways in which an investor can get income.
If you are investing just in stocks, even if it's for income, volatility of stocks is considered fairly high. It's in the range of 15 to 16 percent. In other words, in a typical year, it's quite likely that you would see your stock investments go up and down by that amount.
If you invest in bonds, the volatility is not quite that high. It's somewhere around a third of the volatility of stocks, except that the interest that you may earn from bonds may be at risk at different points in time. For example, right now the bond environment is such that yields are very low, and investors are worried about bonds being overvalued.
So a combination of some low volatility investments, such as bonds, and a combination of higher-volatility investments such as stocks, could create a portfolio that may be appropriate for an investor.
A multi-asset approach for income would allow an investor to be tactical about their investments also. If you are just invested in bonds, it may provide a stable return stream of yield, but bonds may be overvalued at a point in time. And if that's your only source of income, you're sort of stuck in that investment stream.
Similarly, if stocks are your only source of income, then you're stuck in that investment stream. A multi-asset tactical approach allows you to have a diversified portfolio, and at the same time, tactically change the composition of that portfolio when there are better opportunities available in different parts of the capital structure.
The views expressed are as of May 2017, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate.
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