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Investors urged to play it cool in the middle ground

INVESTORS who fiddle with asset-allocation strategies to protect their superannuation from the volatility stalking global financial markets could be sacrificing long-term gains for a short-term sense of security, a report from the investment services group Mercer warns.

INVESTORS who fiddle with asset-allocation strategies to protect their superannuation from the volatility stalking global financial markets could be sacrificing long-term gains for a short-term sense of security, a report from the investment services group Mercer warns.

The head of Mercer's asset-allocation team in Australia and New Zealand, David Stuart, said despite the recent turmoil and market volatility, it was too early to determine whether the debt crisis in Europe and the US could plunge the global economy back into recession.

"Now is not the time to be a hero - investors need to tread carefully and focus on the bigger picture," Mr Stuart said.

"Portfolios should be sitting in the middle at the moment - if investors choose to either underweight or overweight their asset allocations, they are making a bet on which way the European debt crisis will develop, when we just can't be certain yet."

Mr Stuart said although investors might be tempted to trade the peaks and troughs, this was risky. "In the current environment, we believe investors need to focus on their long-term investment targets," he said.

He said that during the economic and financial turmoil, rather than switching from growth-asset classes, such as foreign and Australian equities, to more defensive investment vehicles, such as cash and bonds, investors should maintain a neutral stance for their superannuation.

This meant, for example, if you were many decades away from retirement and the benchmark strategy for your age was a 70 per cent allocation of growth assets and only 30 per cent exposure to defensive investments, investors should cling to this benchmark. "Don't try to be clever by cutting your growth allocation or overweighting it," he said.

When it came to particular asset classes, the Mercer report, which provided a perspective on relative market valuation and a quarterly market analysis for institutional investors, did find one slightly brighter spot.

"Emerging market equities have a positive, longer-term structural story and recent underperformance has restored valuation opportunities," Mr Stuart said.

Both global and small capitalisation Australian companies retained an "unattractive" rating.

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