Losses aren’t the only risk to worry about

Our balanced-risk approach is designed to manage the three main risks that all investors face

Given today’s headlines – including an impeachment inquiry, trade wars, and a looming Brexit deadline – it’s not surprising that investors are particularly concerned about the potential for equity market volatility. But risk is always present for investors — and the possibility of losing money is just one form it can take. Below, I describe three principal challenges investors face, and the Invesco Global Asset Allocation team’s approach to managing those three risks.

Three risks all investors face

1. Drawdown risk. This is the risk that made headlines this month — and it affects investors of all ages. Steep losses may be the most devastating early in retirement, as they deplete the nest egg that a retiree was planning to live off of for the rest of their lives. But losses don’t just hurt retirees — they can cause pre-retirees to delay their retirement, and younger workers who suffer large losses may sour on investing altogether. During times of economic contraction, when stocks are falling, high-quality government bonds may help defend against steep losses.
2. Longevity risk. Simply put, this is the risk that you may outlive your money — not because you’ve suffered losses, but because your portfolio isn’t growing. If you move your entire portfolio to cash to avoid stock market volatility, then you’ve traded one risk for another. Stocks are generally used as the primary hedge against longevity risk, as they have higher long-term growth potential than bonds.
3 Inflation risk. Of course, no matter what the balance is on your portfolio, it’s your actual spending power that matters. And when the prices of goods and services rise due to inflation, spending power suffers. Historically, when inflation has risen, the price of commodities has gone up as well. This may help defend against the impact of unexpected inflation.

How our team balances these risks

Invesco Balanced-Risk Allocation Fund seeks to address these three risks by investing in stocks, bonds and commodities, and by balancing the risk that each brings to the portfolio.

What does this mean? Instead of investing 1/3 of our assets into each category, we begin our investment process by seeking to have each category represent about 1/3 of the portfolio’s risk. Since stocks are typically more risky than bonds, for example, this may mean that the allocation is more weighted to bonds. Then, we also have the ability to opportunistically add to or subtract from our weighting in a category in response to specific opportunities or threats.

How is this different than traditional portfolio construction? The traditional “balanced” portfolio is a 60%/40% split between stocks and bonds. This type of portfolio is mostly exposed to the drawdown risk of stocks. And, because of today’s low yields, the bond portion may be tilted toward bonds with higher credit risk — which tend to have higher correlation to stocks than government bonds do. And, this type of “balanced” portfolio has no commodity exposure, which limits its ability to hedge against the impact of inflation

Key takeaway

While traditional allocations may have a lot of holdings, there is big difference between having a high degree of segmentation and achieving desired diversification. Said another way, traditional portfolios may have their eggs in many different baskets — but those baskets may all be in the same truck.

Learn more about Invesco Balanced-Risk Allocation Fund.


Important information

Blog header image: Calin Stan / iStock / Getty Images

Diversification does not guarantee a profit or eliminate the risk of loss.

Brexit refers to the scheduled exit of the UK from the European Union.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Should the Fund’s asset classes or the selected countries and investments become correlated in a way not anticipated by the Adviser, the  risk allocation process may result in magnified risks and loss instead of balancing (reducing) the risk of loss.

An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.

The risks of investing in securities of foreign issuers, including emerging markets, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.

By investing in the subsidiary, the fund is indirectly exposed to risks associated with the subsidiary’s investments, including derivatives and commodities. Because the Subsidiary is not registered under the Investment Company Act of 1940, as amended (1940 Act), the Fund, as the sole investor in the Subsidiary, will not have the protections offered to investors in U.S. registered investment companies.

Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited.

Underlying investments may appreciate or decrease significantly in value over short periods of time and cause share values to experience significant volatility over short periods of time.

The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the Fund.

David Gluch has served as a Client Portfolio Manager for the Invesco Global Asset Allocation team since 2012. He works with clients across global institutional and global retail channels, and he is a frequent speaker at industry conferences discussing the topics of asset allocation, commodities and risk management.

Mr. Gluch joined the firm in 1995. From 2005 to 2012, he served as head of US Product Management, where he oversaw product positioning, strategy and servicing for the retail and institutional channels. While in this role, he co-authored Invesco’s educational and value-add program, Rethinking Risk.

Mr. Gluch received his BBA in finance from the University of Texas. He is a Chartered Financial Analyst® (CFA) charterholder.

|2 min readPosted inMulti Asset