She adds: “This is because rising interest rates reduce high-growth technology companies' future earnings estimates and therefore led to significant falls in share values.
“So while you could take the short-term performance of these stocks as a positive, not diversifying a portfolio in a high inflation environment can lead to poor performance over the longer term for these types of companies.”
Good portfolios are designed with various economic environments in mind so that they are less sensitive to downside shocks.
To best understand the level of diversification achieved in portfolios, Baylee Wakefield, multi-asset fund manager at Aviva Investors, says investors need to perform a range of stress tests.
These include both historical and hypothetical stress scenarios, given that some scenarios have occurred infrequently.
Paracha adds: “The portfolio that can best withstand a range of stresses and is optimal for the current regime should be favoured.
“Diversification should be achieved through strategic asset allocation but can also be elevated through tactical asset allocation, for example by identifying vulnerable parts of the investment universe and reducing portfolio exposure to it.”
Ima Jackson-Obot is deputy features editor of FTAdviser
