Volatile Portfolios Result From Ineffective Diversification

Volatile Portfolios Result From Ineffective Diversification

Posted on January 09, 2012

The market’s movements are driven by the irrefutable law of supply and demand. The law of supply and demand is driven by the actions of buyers and sellers. Investors vacillate between two extremes: the rational intelligence of crowds and the irrational madness of crowds. When investors act independently and rationally markets remain stable and efficient. Irrational and emotional investors cause volatile and inefficient markets.

The primary purpose of diversification is to maintain consistent and low portfolio volatility. Achieving low portfolio volatility requires holding securities that fluctuate differently from each other.

The current volatile markets are the result of securities moving together. Investors are experiencing an increase in portfolio volatility because their current diversification is not working. Today’s challenge is to manage portfolio risk by achieving “true diversification.”

We now have more investment choices than ever before. Wall Street has been better at creating unique securities than managing risk and complexity. True diversification requires a process to actively manage asset allocation and security selection to reduce risk during volatile markets.

Successful risk and volatility management requires a process to adjust a portfolio’s asset allocation and diversification to offset the market’s changing volatility. Much like the weather in Indiana, markets are ever changing. The temperature in your home remains consistent and comfortable because the thermostat manages your furnace and air conditioner to offset the changing outdoor temperature. A fixed percentage asset allocation or buy and hold strategy is too static to manage risk during volatile markets. Similar to a thermostat, managing risk and volatility requires a process to adjust a portfolio’s diversification to offset the market’s changing volatility.


Canterbury's Portfolio Thermostat Matrix helps determine the current market environment or Market State. The Thermostat Matrix process identifies 12 different Market States. Each Market State is based on combining the long term trend, medium term and short term changes in volatility, and a combination of short term market indicators. Of our 12 Market States, 6 States are Bullish, 4 States are Bearish, and 2 States are Caution.

Good news! Our Portfolio Thermostat Matrix actually moved to Market State 9-Bullish (Red, Yellow, Green) on 12/22/11. It then went to Market State 7-Bullish (Red, Green, Green) on 1/3/12. The S&P 500 is currently at the upper end of its trading range. A short term pull-back, on low volume would be healthy. We will continue to add to our equity positions on pull-backs.

Please call with any questions about the Portfolio Thermostat Matrix or our current positions.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom Hardin, Chartered Market Technician (CMT), makes all the final decisions on all investment and portfolio management decisions for Canterbury Investment Management. Tom has more than 30 years experience in the investment management industry and has broad breadth of knowledge. He is known as an innovator, educator and been revolutionary in the advancements in portfolio and risk management.