Risk Management in 2026

chiang_mai

Interesting and potentially useful comments about investment risk management in 2026, from the CIO at Morgan Stanley, intended for their wealth management clients.

Portfolio Moves to Consider

Investors should remember that bull markets are meant to be ridden, not timed. That means: focus on staying invested, rather than trying to predict the exact moments to buy or sell.

Nevertheless, investors should temper their exuberance. The Global Investment Committee continues to recommend an actively managed approach to investing, focusing on maximum portfolio diversification and risk management. We see this approach as far more prudent than passive exposure to a cap-weighted benchmark index like the S&P 500, which is expensive and highly concentrated in a few outsized tech companies.

Also, consider adding exposure to “real assets,” including real estate, commodities and infrastructure. We also like select hedge funds and are warming to 2026 new vintages in venture capital and growth-oriented private equity alongside select secondaries.

Meanwhile, in credit, consider focusing on distressed and asset-backed strategies.

https://www.morganstanley.com/insights/articles/stock-market-outlook-bull-market-risks-2026

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chiang_mai

I have used the L&G US Index fund for many years, to cover all my US investing needs and it's worked out really well. I have now swapped that fund in favour of a global equities fund, one that has a 65% allocation to US stocks. Doing so has allowed me to reduce the volatility of funds that I hold; reduce my exposure to Tech.; improved my downside capture rate; eliminated the risk of a being in a single investment market; and, has allowed me to spread my risk globally. Most importantly it means that I will be unlikely to suffer the full effect of any falls by the US index, if markets correct or worse, which I think is the point the CIO was making in the article above.      

Eyeful

1. A CIO of a major investment bank, making comments on risk to their wealth management clients, I cannot help but think of someone at the top of the tree, rubbing their hands together & thinking to themselves,"how can I frighten our customers even more, so we can extract the maximum money from their pockets into ours!"

2. Of course The Global Investment Committee continues to recommend an actively managed approach to investing because they will be able to charge more, than for the passive approach.

3. A cheap passive Major World Wide Tracker Fund like the ACWI, should have many of the "Real Assets" they think you should have in your portfolio. It would however be much cheaper than their "Active Management" approach.So would not be as profitable for them.

4. If they like "Active Management" you can be sure they will LOVE "Hedge Funds" for their wealthy clients,
With "Hedge Funds" they can market them with
(a) Snob Appeal: You have to be "Invited to join", so you must be a very special person!
(b) The charging structure is typically "2 and 20"
Each year you will pay 2%. Then each year they make any profit, you pay them 20% of the profit made.
(c) Whats not to like: You take all the risk, while they collect 20 % of any gamble which pays off!
 

chiang_mai

Eyeful said:

1. A CIO of a major investment bank, making comments on risk to their wealth management clients, I cannot help but think of someone at the top of the tree, rubbing their hands together & thinking to themselves,"how can I frighten our customers even more, so we can extract the maximum money from their pockets into ours!"

2. Of course The Global Investment Committee continues to recommend an actively managed approach to investing because they will be able to charge more, than for the passive approach.

3. A cheap passive Major World Wide Tracker Fund like the ACWI, should have many of the "Real Assets" they think you should have in your portfolio. It would however be much cheaper than their "Active Management" approach.So would not be as profitable for them.

4. If they like "Active Management" you can be sure they will LOVE "Hedge Funds" for their wealthy clients,
With "Hedge Funds" they can market them with
(a) Snob Appeal: You have to be "Invited to join", so you must be a very special person!
(b) The charging structure is typically "2 and 20"
Each year you will pay 2%. Then each year they make any profit, you pay them 20% of the profit made.
(c) Whats not to like: You take all the risk, while they collect 20 % of any gamble which pays off!
 

Possibly. But there again, there's always the possibility that it's merely sensible advice under the circumstances. Doctors in medical school are taught not to overthink things, to believe that simple answers are the most probable and not to go off in serach of complex answers when simple uncomplicated ones fit.  

Alexland

the CIO at Morgan Stanley said:

Investors should remember that bull markets are meant to be ridden, not timed. That means: focus on staying invested, rather than trying to predict the exact moments to buy or sell

Bull markets just happen there is no overall intent behind them it's usually just people getting over excited bidding up prices expecting them to keep rising at recent rates not understanding or being bothered that the price they are paying might already be too high for the asset's medium term prospects.

If you agree with Ben Graham the market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is the realist who manages the percentage allocations in their portfolio to sell to optimists and buy from pessimists. 

The longer the US bull market runs for the safer it feels and more dangerous it can become and while I wouldn't advocate short term betting against it (as Keynes rightly tells us markets can remain irrational longer than you can remain solvent) it is IMHO worth ensuring that at least a proportion of your assets have attractive medium term prospects.

I'm sure AI will eventually be important but so was the Internet and that didn't help the average Dotcom investor and even those investing in the winners suffered price drops. There is no 'margin of safety' in the pricing of the mega caps they are becoming quite risky even if most of their business is sound.

Also, consider adding exposure to “real assets,” including real estate, commodities and infrastructure. We also like select hedge funds and are warming to 2026 new vintages in venture capital and growth-oriented private equity alongside select secondaries.

I agree with diversifying into things that should provide a return above inflation. My current preference is index linked gilts because they are not economically sensitive if held to redemption. I'm mostly using TR50 to lock in 2.1% above inflaiton with no fees for the next 25 years. There may be opportunities for additional gain (filling out my gilt ladder) by 'riding the yield curve' and rebalancing into crashed equities along the way but if not then it offers a good enough return to meet my objectives.

poseidon1

An interesting comparison with the Morgan Stanley comment to their wealthy clients is Vanguard's reccomended rotation to favour  60% Bonds and 40% equity approach for retail investors over the coming 3 to 5 year investing horizon - see below.

https://finance.yahoo.com/news/vanguard-flips-the-script-on-6040-investment-strategy-110026190.html

Concern with regard to high concentration in the tech heavy S &P seems to be common theme between these two investment management institutions at the opposite ends of delivering investment services, but Vanguard's 'about face' on the traditional 60% equity 40% bond ethos is particularly noteworthy in counselling caution to the wider mass of retail investors.

itwasntme001

Vanguard have been saying US equities look expensive for over ten years.

They know nothing worth taking seriously, much like pretty much anyone else.

Just stick to common sense appraoch to investing by sticking to a balanced portfolio dependent on your risk tolerance and needs.

Whether or not 60:40 or 40:60 or whatever x:y does better or is likely to do better is pointless trying to guess for.

aroominyork

chiang_mai said:

"The Global Investment Committee continues to recommend an actively managed approach to investing, focusing on maximum portfolio diversification and risk management. We see this approach as far more prudent than passive exposure to a cap-weighted benchmark index like the S&P 500, which is expensive and highly concentrated in a few outsized tech companies."

Has this committee ever recommended a passive, index-based approach to investing? 

kempiejon

Have these active funds consistently beaten the index idea long term? My own asset allocation has been moving this year adding more gold, gilts, FTSE100 and commodities. The global index keep going up but I am delighted that my newer choices of gold and ftse100 are outpacing the S&P500 etf.

chiang_mai

aroominyork said:

chiang_mai said:

"The Global Investment Committee continues to recommend an actively managed approach to investing, focusing on maximum portfolio diversification and risk management. We see this approach as far more prudent than passive exposure to a cap-weighted benchmark index like the S&P 500, which is expensive and highly concentrated in a few outsized tech companies."

Has this committee ever recommended a passive, index-based approach to investing? 

It helps to read and understand the article. The article doesn't recommend active or passive investing generallly, it only refers to the S&P500 index and it explains why, it doesn't say that all funds should be managed ones rather than passives. It says that the S&P 500 is tech heavy and that tech is over valued, which is why a managed fund may be safer than a passive one. 

ivormonee

poseidon1 said:

Vanguard's 'about face' on the traditional 60% equity 40% bond ethos is particularly noteworthy in counselling caution to the wider mass of retail investors.

Thanks for pointing this out. That's a really good observation. I wasn't aware that they'd done that and it's food for thought.