Global Macro Investing and the Benefits of Multiple Asset Classes

By Paul Kovner

If you have been into investing for long you have likely heard that diversification is the only true free lunch. On the other hand if you have gone to a financial planer and then let them diversify your funds you have likely been disappointed. In fact if you had been diversified the way most planners do it you would still have negative returns after the last ten years. Lucky for you diversification is still a very useful tool and one that you can use to your advantage. You just need to learn the correct way to do it.

Most financial advisors will diversify your investments by splitting your money into a few buckets such as domestic stocks, foreign stocks, and then place some in domestic Treasury or investment grade corporate bonds. If all you have is a mix of stocks and bonds you are only diversified into two asset classes while you could be doing so much better.

When you are properly diversified you will be invested in all liquid asset classes and sometimes even a few that are relatively illiquid investments. In addition to being in several asset classes you will also be in several different types of strategies with multiple time horizons. Global macro traders have known for years that if you dont cast your net wide you will have a hard time performing in all market types. If you just have a bunch of global stocks then all your investments are extremely correlated which means when a few drop the rest drop. One of our goals as investors is to avoid that.

Global macro investors diversify into several different asset classes. Some of the more common ones are domestic stocks, foreign stocks, Treasury bonds, investment grade corporate bonds, junk bonds, foreign government bonds, foreign corporate bonds, commodities, real estate, and currencies. Some people will go as far as to trade in art and other collectibles as they are uncorrelated to regular investments and therefore add benefit if you have expertise in that area.

Global macro traders would all agree that one of the most important goals of an investor is to look for the best risk to reward opportunities. This is in stark contrast to most financial planners who just say buy and hold stocks for the long run. Yes, it can work for the long run but sometimes the long run is 30 years before you even see a positive return. Most of us dont live forever so lets plan accordingly.

Luckily we can diversify not only across asset classes but also across different strategies in each one. For instance if you could allocate some money to a long term value investing strategy that looks at three to five years out investing in stocks and then also invest in a good short term trading fund. By doing this you can capture slightly different types of alpha or excess return. If you build a portfolio this way you will become extremely diversified and uncorrelated to regular investments.

If you do this properly and diversify into not only different assets but also into different strategies inside each asset class you will be able to capture returns that the classis stock bond mix would have missed. While this is no guarantee of positive returns every day, over time you will see a reduction in risk and an increase in reward. Diversification is really a free lunch.

If you are a relatively active investor you can achieve positive returns in multiple asset classes yourself by building market beating models in different markets. Yes, you can and indeed should use bottoms up research but in the spirit of being efficient with your time you should automate as much as possible so that you are able to be a more efficient global macro trader and miss fewer of the potential opportunities that occur in different markets. - 23167

About the Author:

The Macro Trader helps investors find great Global Macro Investing opportunities. Mean Reversion is but one of the many strategies that we use to help find the best risk to reward opportunities across the globe.