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One Strategy to Consider as Volatility Picks Up

Wells Fargo Investment Institute - February 7, 2018


One Strategy to Consider as Volatility Picks Up

One Strategy to Consider as Volatility Picks Up

Sources: Morningstar Direct, Wells Fargo Investment Institute, December 31, 2017. Hypothetical 4AG (Four Asset Group) Moderate Growth & Income (MGI) without Private Capital  portfolio is composed of 3%  Bloomberg Barclays U.S. Treasury Bill 1-3 Months, 11% Bloomberg Barclays U.S. Aggregate Index (5-7 year), 6% Bloomberg Barclays U.S. Aggregate Bond Index (10 year+), 6%  Bloomberg  Barclays U.S. Corporate High Yield Index, 3% JPM GBI Global Ex-US TR USD Index, 5% JPM EMBI Global TR USD Index, 20% S&P 500 Index, 8% Russell MidcapTR USD Index, 6% Russell 2000 Index, 5% MSCI EAFE GR USD Index, 5% MSCI Emerging Market GR USD Index, 5% FTSE EPRA/NAREIT Developed TR USD Index, 2% Bloomberg Commodity Index, 3% HFRI Relative Value Index, 6% HFRI Macro Index, 4% HFRI Event Driven Index, and 2% HFRI Equity Hedge Index. Hypothetical and past performance is no guarantee of future results.

Diversification may reduce downside risk

Low volatility was a major market theme in 2017 as asset prices marched to new highs. It may be tempting to assume that it will be possible to diversify a portfolio once volatility returns, but attempting to time the market is usually a risky practice.

This chart shows that, over a horizon that includes both high and low volatility (as measured by peak-to-trough drawdown), a hypothetical diversified allocation may not lose as much value as an all-equity allocation. This is because other components of the portfolio have not always moved in the same direction as equities over long periods of time.

What it May Mean for Investors

A diversified allocation has the potential to provide more consistent and smoother returns than an investor may experience in a single asset class. We believe that investors should avoid becoming too complacent as there is the potential for a pickup in volatility to historically more typical levels in the coming years.
This chart was excerpted from the Global Perspectives report dated January 30, 2018.