Tactical Portfolio Adjustments in a Crisis (Podcast)

The 2007–09 financial crisis has been subjected to a great amount of scrutiny. In December 2009, for example, the Research Foundation of CFA Institute published Insights into the Global Financial Crisis, a collection of pieces by industry thought leaders that examine the causes and effects of the crisis. More recently, the July/August 2013 issue of the Financial Analysts Journal included an article by Paul Pfleiderer and Terry Marsh, “Flight to Quality and Asset Allocation in a Financial Crisis,” that considers the natural crisis response by investors: fleeing to low-risk quality investments. Abby Farson Pratt, assistant editor at CFA Institute, got the chance to talk with Pfleiderer about his research as part of our FAJ author interview series.

In the interview, Pfleiderer says that he and his coauthor wanted to examine the “tactical responses” you should make as an investor during a crisis, specifically asking, “How do you change your portfolio allocation in light of big changes in the environment?” He explains that investors often fall into the trap of “thinking of the world as a given” and not thinking through the equilibrium implications of their own responses in aggregate with the responses of similar investors. He and Marsh set out to find the optimal investor response in a crisis and found that, ideally, “the amount of trading that you would do . . . is actually quite limited.”

To hear Pfleiderer discuss the specifics of his results and his thoughts on how his research applies to liquidity during a crisis, listen to the full interview above or download the MP3.

CFA Institute members can access the full journal article on the CFA Publications website.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.