Few investors make their allocation decisions lightly, and most would like to think they make the best possible choices, given market conditions and the information available. Yet like any human activity, there are often behavioural factors in investing that, despite not always being apparent, can lead to counter-productive decisions. This is particularly true in the current environment, when investors are in a sense being pulled in competing directions.

An extended period of financial repression means returns on traditional assets have declined and investors need to take on more risk to secure yield. At the same time, with interest rates and inflation beginning to pick up, markets have grown more volatile and investors need to take steps to insulate their portfolios from sudden downturns.

The key to preserving value in this situation is to curb problematic instincts in the investment process, and opt for an approach that actively balances a wide range of minimally correlated assets to help sustained performance regardless of market conditions.

Academic research has identified a host of unconscious motivations that steer investment decisions, from herding – the tendency to ‘go with the flow’ and follow the bulk of other investors – to anchoring bias, or relying on past prices rather than contemporary realities in deciding on optimal valuations. However in an era of depressed returns there is one common behavioural factor that can be particularly destructive to value – aversion to risk.

Excessive risk should of course be avoided. But as returns are essentially the compensation investors receive for taking risks, a certain amount of risk is inevitable and indeed desirable to cultivate value over the long term. Rather than shunning risk altogether and confining a portfolio to ‘safe’ but underperforming assets, the investor should seek ‘smart’ risk that identifies and seizes on opportunities, and harnesses forces such as volatility to the portfolio’s advantage.

Given the region’s economic dynamism versus the rest of the world, Asia Pacific should play a part in any smart risk strategy. The Asian equities and corporate debt opportunity set has expanded rapidly and combines relatively attractive yields with growth prospects. Yet in exploring these opportunities, for risk to remain ‘smart,’ allocations need to be based on due diligence and analysis of fundamentals, informed by on-the-ground network and expertise.

Smart risk also recognises that even the best assets will not outperform all the time, and diversifies the portfolio accordingly. Diversification may be a time-honoured investment strategy but there is a behavioural tendency towards insufficient or ‘naïve’ diversification – that is, focusing the portfolio on an insufficient number of stocks, or splitting a portfolio among several funds without really considering their holdings and investment objectives. The result may be that the investor still ends up excessively leveraged to one asset class, economy or sector, and therefore tilted towards certain risks.

The answer to this problem – and many other negative investment behaviours – is a multi-asset strategy that embeds multiple layers of diversification in the portfolio. This involves moving beyond bonds and equities to consider the potential role of currencies, cash and alternative assets.

This approach further avoids excessive correlation by drilling down to ensure diversification within asset classes, by for example blending emerging and developed-market equities; bonds of various durations; or assets that carry different risk premia.

Applying fundamental analysis that examines how various factors – including market and economic cycles, valuations and special situations – affect each of these asset classes, and actively managing the portfolio based on these conclusions, ensures risks are controlled and opportunities capitalised on.

With the right mix of assets a portfolio can be tailored to virtually any goal and risk profile. A more conservative portfolio, for example, would emphasise the lower-risk segments of the fixed-income space, while a more aggressive strategy would focus on assets with high return potential, such as Asian high-yield bonds, assuming higher risks.

A multi-asset approach helps avoid cluster risk in a portfolio. Yet as market conditions shift, active management is aiming at to generate potential additional value, limit losses, and ensure decisions are made in line with an overarching strategy and long-term portfolio goals, rather than emotional considerations. This is particularly important in times of market stress when most asset classes are trending downward, the urge to panic is the strongest, and the manager should have the freedom to flexibly deploy a range of tools to preserve portfolio value.

Asset management at this level, that anticipates and acts on opportunities and market turning points, is a complex process that needs to be informed by constant monitoring and in-depth analysis of various fundamental factors, from market and economic trends to changes in valuations.

These responsibilities, along with the need to access the broadest possible range of assets and approaches to support an investor’s individual ambitions, mean multi-asset strategies should be driven by a large, diverse team with global reach and extensive research capabilities. By leaving their portfolios in the care of these experts, investors can achieve a resilient triad of diversification, flexibility and risk management that’s perfectly designed to address the at times opposing needs to avoid excessive risk and preserve return potential. Better yet, they can enjoy the confidence that the value they are accumulating is being built on strategic, rather than more vulnerable behavioural, foundations.