We have seen some significant falls overnight in the US (around 3%), and the Australian equity market is down today (around 2%).

Our core portfolio, the LDI Connect 7 Portfolio, is a return-seeking portfolio with a reasonably high return target of Cash + 4% p.a. net of all fees, over rolling seven-year periods. In order to meet this return objective, the portfolio has a sizeable allocation to equities (currently 49%) – an asset class which we believe will have strong returns over the medium to long-term. That being said, we have constructed a portfolio that also has exposure to other types of return drivers, which aims to ensure a “smoother ride” compared to a pure equities portfolio.

This diversified approach means the portfolio is also exposed to asset classes such as property, infrastructure, fixed interest credit and a range of other strategies. Investing in these asset classes provides diversification benefits to the overall portfolio, particularly in the case of a sharp downturn in equity markets. We also manage foreign currency exposure carefully and believe that foreign currency can offer diversification benefits in times of stressed economic scenarios.

Whilst for an individual day losses of around 3% for the equity markets are large, they are not unexpected, particularly after the strong performance over the last few years. We have been concerned for some time about the prospective of a fall in markets, and have consciously held an underweight exposure relative to the long-term target.

There are many moving parts within the portfolio, but as things stand, looking solely at equity exposure, estimated returns for the day are around -1%.

We have experienced a prolonged period of low volatility in markets, and this often results in future expectations of similar outcomes. Taking risk is necessary to achieve return objectives, but we haven’t experienced what this means for some time.

We will provide further updates should markets continue to fall, though we have strong conviction that the approach we have taken will be less volatile than what you see in the headlines. The longer-term volatility of the portfolio stands at approximately 40% of the ASX 200 index equity market.

As always, if you have any queries or concerns regarding the above developments, or your investments more broadly, please contact your adviser or our office on (07) 3391 5055 or via advice@mgdwealth.com.au.

Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.