Don't Ignore the Threat of Another Market Tantrum

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Jeff Knight looks at why market tantrums are the greatest risk management challenge facing investors today — and three ways to help protect your portfolio.

On September 9, following more than 40 trading days where it failed to make a full percentage point move in either direction, the S&P 500 Index dropped by nearly 2.5%. On the same day, the yield on the benchmark 10-year Treasury bond rose from 1.60% to 1.68%, a loss of roughly 0.7% in price terms . Commodities fell by several percentage points. REITs lost almost 4%, and the list goes on. September 9 was a painful day for concentrated and diversified portfolios alike. While the damage was softened, if not reversed, for most asset classes by the end of the month, the pattern of performance that day should be noted because it represents the most insidious risk management challenge facing investors today. Specifically, how can we protect our portfolio values if all asset classes decline at the same time, particularly if these declines become more significant or more durable?

Consider the likely source of the financial market’s vulnerability to simultaneous declines. Nearly every major asset class has been increasing in value since the end of the financial crisis

Prices of most asset classes have steadily increased since the financial crisis

Asset class performance (annualized): 03/09/09 to 09/30/16
Source: Bloomberg and Columbia Management Investment Advisers, LLC

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