Investors should consider how to diversify their portfolios, particularly in the early days of the financial crisis, according to a new report.
“We are in a bubble right now,” says John Ralston, senior market analyst at brokerage NAB Financial Services.
In short, investors are in the middle of an incredibly rapid and dramatic rise in prices for many asset classes.
The report, from NAB’s Emerging Markets Research Group, finds that, over the last 12 months, ETFs have increased in value by more than 200 per cent.
It is the biggest increase since the global financial crisis and, with the exception of the U.S. and U.K., the markets have been hit hard by the financial downturn.
“What you need to consider is how much volatility there is going to be in the asset classes,” says Mr Ralstone.
Investors should be prepared to trade more volatile asset classes, he adds.
Some asset classes are already in a state of turmoil, with commodity prices dropping, the Chinese economy slowing and the yen weakening.
Investors have also seen a huge drop in demand for some commodities and currencies.
But the biggest risk for investors is that the economy and housing markets could still get hit hard, Mr Rolston says.
“We have seen some really significant, big crashes in asset classes in the last few years,” he says.
He adds that there could be an acceleration in this cycle as investors look to protect their cash and take out large positions in a few asset classes before the volatility picks up.
Many asset classes have been heavily influenced by the economic downturn, with oil and gold rising in value.
And there has been a lot of speculation in the financial markets that the Fed might start to tighten monetary policy later this year.
However, investors should be cautious, says Mr Nalder.
If you want to trade these asset classes aggressively, you need a good portfolio management system, which is a combination of ETFs, and diversification strategies, he says, adding that most ETFs trade at under $50 a share.
There is also the issue of price stability.
If the market falls, the ETFs could lose value and so investors will need to take out additional capital to offset that risk.
As for the outlook for the broader economy, the NAB report says there is some optimism.
For example, the U, S and D are still growing at about 1.5 per cent a year, while inflation is forecast to stay around 2 per cent over the medium term.
Meanwhile, the unemployment rate is at its lowest level in more than five years.
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