LEARN ABOUT OUR MARKET STATE
January 12, 2015
Bulletin
CLASSIFICATION SYSTEM
The heart of our market state classification process is an attempt to differentiate normal market conditions from unusual market
conditions. Most of the time, we're happy to conclude that conditions are normal and that we bring no special insight to the
investment process. But occasionally things become unusual enough that it's worth changing your core investment strategy. It
could be unusual enough in the bond markets, say interest rates get very, very, very low, that could trigger a reckoning on our part
that conditions are different than normal. It could also happen in the stock market and what we would monitor is whether conditions
are typical or very unusual, first. And second, how those unusual conditions matter and how they interact as we develop our overall
market classification and outlook from the world’s asset classes.
It's very important that we incorporate a different strategic asset allocation that maps to each of the four different market states. As
much for behavioral purposes as for investment purposes. In other words, if the market state argues that it is an environment that
is friendly to taking risk, then we want to build our accountability around a risk-taking strategy. On the other hand, if the market
classification suggests that conditions are dangerous enough that capital preservation is the top investment priority then we want to
calibrate our accountability to a preservation oriented strategy. Only by linking those discrete strategic portfolios to the states, can
we ensure an adequate and forceful enough response to changes in market conditions to affect our portfolio objectives in each
state.
A great example from 2014 of the benefits of this adaptive approach would be the way the year ended in December. Our
methodology mapped into our capital preservation market state for the month of December and then what that meant was is that
rather than depending upon our normal diversification to protect portfolio values we needed to do more. We needed to de-risk the
portfolio. We needed to shift our allocations away from volatile holdings like equities, and commodities, and foreign currencies, and
build a very safe portfolio. The benefit of that is obvious because December was a month that delivered negative returns across a
wide array of asset classes. So simply being balanced would not have protected the portfolio value as well as being deliberately
oriented towards preservation and we ended up relatively unscathed for the month of December.
The views expressed in this material are the views of the Global Asset Allocation team as of February 20, 2015 and are subject to change without notice
at any time based upon market and other factors. All information has been obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such
information and it should not be relied on as such. This information may contain certain statements that may be deemed forward-looking statements.
Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those
discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable. Past performance does
not guarantee future results. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance.
This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should
always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance.
Columbia funds are distributed by Columbia Management Investment Distributors, Inc., member FINRA, and managed by Columbia Management
Investment Advisers, LLC.
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