"The first element of the strategy is to be forward-looking rather than backward-looking.
'That speaks to asset allocation and geographical exposures,' El-Erian said.
The second element is that the road forward will be mired with sharp turns and bumps. As a result, investors must position their portfolios to benefit from cyclical trends.
'That bumpiness constitutes an additional challenge for buy and holds, which is to make sure that people can in fact hold -- because when you have a very bumpy journey, there is a temptation to stop holding at the wrong time,' he said.
'So there has to be a much more responsive element of the portfolio that is looking to capture not long-term secular and structural trends, but looking to catch shorter-term cyclical and technical trends,' he said.
The third element of El-Erian's plan is conscious risk management, which gets at diversification. In the past, El-Erian said, one of the problems with the buy-and-hold strategy was that it encouraged people to think that diversification was sufficient for risk mitigation.
'That's no longer the case. Diversification is necessary, but it's not sufficient,' he said. It's necessary because it's the best method for mitigation of risk, but it's not sufficient because, as El-Erian points out, you can have years, such as last year, in which all the correlations go against you. Therefore, he said, buy and hold needs to be supplemented with much more responsive risk management.
'It's not enough to say I'm going to be able to buy and hold simply because I'm diversified. One has to go a few steps further and ask what does it look like when I'm actually buying and holding?' he said.
Building on that, El-Erian said a portfolio should be constructed such that only part of it is held for the 'long term,' which he defines 'long term' [sic] as three to five years, max -- because it's difficult to forecast what happens much beyond that."
