The Future of Portfolio Diversification

Whether you’re a millennial embarking on a relatively new investment journey, a hard working Baby Boomer seeking to grow your portfolio in order to someday enjoy retirement, or a retiree who needs to make your money last, it’s wise to pay attention to portfolio diversification and rebalancing. We have all heard that before!

While change is often uncomfortable -- even financial advisors sometimes dread discussions related to investment diversification -- the topic is one that cannot be ignored. Those who keep all of their investment eggs in one basket are missing an opportunity to profit from exposure to new asset classes while reducing risk overall. 

Indeed, studies show that only two percent of managers produced statistically significant alpha in 2015.* Maybe the status quo isn’t such a good idea after all. Are we perhaps, just in a sideways trend, or an unprecedented new era of portfolio management?

It’s important to understand that diversification is much more than simply buying stock in various industry sectors, tracking the charts and hoping for the best. When exploring ways to reshape your portfolio, it is essential to seek diversification by sectors, asset classes, position/size and geography. 

Don’t be afraid to step outside of your comfort zone and pursue emerging strategies with the potential to outperform. For example, technological advances now make it possible to use sophisticated algorithms to make investment decisions in inventive new ways. 

Did you know that in the coming years, robots are expected to replace commercial truck drivers? Did you realize that in some countries, the lack of a population base to take care of their elderly may result in the use of humanoid robotics to take care of the elderly and infirmed? How did this happen so “quickly,” and right under our noses? 

Technology, as it is evolving, is becoming more and more powerful, and making quantum leaps in the efficacy of the industries it impacts. Although I personally see the replacement of labor by robots as a serious economic concern to those directly impacted by the shrinking workforce, in other sectors, the use of technology has created massive opportunity as it pertains to one’s portfolio.

Here are a few forward-thinking ideas to keep in mind in today’s dynamic business climate. Let’s take a closer and more detailed look:

“Smart” Investing May Benefit from Artificial Intelligence

According to a TechCrunch article this week, robots are expected to replace more than three million humans in the workplace by 2018 and by 2020 smart machines will be a top investment priority for more than 30 percent of CIOs. In the investment arena, sophisticated artificial intelligence and algo-trading are already the basis for sophisticated, proprietary investment approaches. 

Mathematical models that optimize timing, price, quantity and risk are the cornerstone of algo-trading and are capable of reducing the risk of manual errors in placing trades as well as the possibility of mistakes by human traders based on emotional and analytical errors. In the case of Mediatrix Capital, our systems are capable of performing in a capacity that would require a minimum of 40 minds working at top speed and laser focus, instantly. Do you have a staff that large managing your portfolio exclusively? You can now.

Use Alternative Investments Like An Institutional Investor

Private equity, certain hedge funds, venture capital and other alternative investments are often a valuable addition to the investment portfolio. They offer higher levels of returns that are uncorrelated to the markets and add value in that they behave differently than traditional investments. 

Various types of alternative strategies offer different benefits and should be tailored to meet the investor’s individual needs and portfolio goals. Because they are often less liquid and very specialized, investors must be accredited. In the future, we predict that the alternative investment landscape will continue to expand and evolve with new offerings that take advantage of advanced technology.

Track World Events and Adjust Accordingly

This year’s Brexit vote sent markets spinning, as those who typically only make money in bull markets and do not understand how to profit in a bear market ended up on the wrong side of that trade! When the Black Swan event occurred in early 2015 and the Swiss Franc uncoupled from the Euro, markets were also in a tailspin. 

In 2015, at a time when many trading systems lost money, Mediatrix Capital clients actually made money in spite of having some trades on the wrong side during that month. This was possible due to proprietary artificial intelligence and an algorithmic approach that incorporates overlay and absolute return strategies with quantitative model building and order-flow analysis, which have the ability to limit the size of a trade and initiate defensive strategies.

Embrace Volatility, Stay Calm, and Stay Focused

When the markets are volatile, it’s easy to give way to emotions and forget to act logically when entering or exiting an investment decision. It’s imperative to understand that volatility can be used to one’s advantage if you are able to remain calm and focus on the best strategy for each unique situation. However, the component of speed is also critical, which is never the friend of the emotion. 

For example, algorithms show no emotion when they utilize software programs with a defined set of rules to place trades. Their ability to generate profits at a speed and higher frequency that is impossible for a human trader offers one way investors can defend their edge and at a macro level, augment their portfolio value.

Today, it is more important than ever to seek out smart managers that thrive on market movement and are able to make money both during bull and bear markets. Those managers need to be part of your investment portfolio in order to help secure your financial future. - equities.com