Recent ‘Upside’ Contagion Could be Warning Sign of Possible Downside to Come
Well-executed asset allocation and diligent portfolio rebalancing have been, and remain, the essential elements of long-term investment success. But there are those rare occasions, such as the fourth quarter of 2008, when even the best-designed portfolios can be devastated by a phenomenon called contagion.
Contagion happens when typically unrelated asset classes move in unison. It can occur on the upside as well as the downside: Even in the current recovery cycle, markets are showing troubling signs of contagious behavior, with stocks and commodities, for example, moving in virtual lockstep for extended periods, according to Jerry Miccolis, CFA®, CFP®, chief investment officer at Brinton Eaton, a wealth advisory firm in Madison, NJ.
Downside contagion on the scale of late 2008 is rare, but it can happen again, at any time, and with no warning. When it does occur, portfolio diversification is rendered temporarily impotent, says Miccolis. Investors are well advised not to be caught unprepared next time.
But there is good news: Dynamic asset allocation and explicit portfolio protection are two effective defenses against contagion. Dynamic asset allocation is a proactive strategy that uses economic and research-based market signals to guide the nimble restructuring of portfolios to protect them from serious damage. Portfolio protection is, effectively, a “safety net” to protect portfolios from catastrophic market declines.
“Think of dynamic asset allocation and portfolio protection as an inoculation against contagion. We cannot guarantee 100 percent protection, but we believe these approaches are sound, well-designed attempts to win by not losing.”
To read more about Brinton Eaton’s views on dynamic asset allocation and explicit portfolio protection, visit www.brintoneaton.com/wp/wpcontent/uploads/2010/12/Contagion.pdf to read a Research Brief on the topic.
About Brinton Eaton
Based in Madison, NJ, Brinton Eaton is a wealth advisory firm with a long history of serving affluent individuals and their families across multiple generations. The firm helps its clients protect, grow, administer and ultimately transfer their legacy of wealth through a full range of integrated services, including lifetime cash flow projections, financial/tax/estate/retirement planning, investment management, charitable giving, and business succession planning. Brinton Eaton’s clients tend to be corporate executives, professionals, entrepreneurs, and retirees with investable assets over $2 million. For more information, visit www.brintoneaton.com.
