GOING BEYOND THE TRADITIONAL INVESTMENT MATRIX
many investors thought they were adequately diversified in 2008, only to see their portfolios collapse during the great financial crisis (GFC). “Modern Portfolio Theory did not fail – if anything, portfolio construction did,” says Professor Christopher Geczy, academic director of the Wharton Wealth Management Initiative, in a research note by BlackRock.
He says what really happened back then, was that many investors did not have the right investments in their portfolios.
“Portfolio construction is challenging enough to begin with, and it’s even harder during times of crisis, when correlations can work against investors.”
Turning to the present, the crisis of the current market collapse across various asset classes has demonstrated some level of correlation among most of them. For example, many investors believed that merely having exposure to both JSE-listed and international stocks provided sufficient diversification, but the stocks turned out to be exposed to many of the same common factors, such as the price of oil.
“There is no doubt that global capital flows will be impacted by Covid-19. The collapse in oil and other commodity prices has also resulted in a revised downgrade in global growth expectations and asset prices,” says Sumaya Aziz, investment analyst at Mergence Investment Managers.
According to Geczy, a traditional 60% stock and 40% bond portfolio would undoubtedly fare better during a market crisis than a 100% stock portfolio but, given
