In a new report, “Volatility Responsive Asset Allocation, Russell Investments recommends that institutional investors use a dynamic asset allocation policy that varies as market volatility changes.

Simply put, as volatility rises, Russell recommends selling out of risky assets. Conversely, as volatility falls, risky assets make sense, Russell says.

“Market volatility is itself volatile,” said Michael Thomas, head of consulting and chief investment officer of the Americas institutional business at Russell. “Markets can be relatively stable at some points in time and explosively volatile at others. Given this fact, a strategic asset allocation policy is no longer necessarily a set of fixed weights that are held constant until the next review, because the associated risk can be highly variable over time.”

Thomas added: “The most impactful events in a portfolio occur at the extremes—10 years of well-behaved markets can have less impact on the ultimate success or failure of a portfolio than a couple of outlier months of extreme returns.

Bob Collie, chief research strategist at Russell, noted that in recent years, pension plans have been far more proactive about varying their allocations, which Russell calls “liability-responsive asset allocation.”

“These dynamic programs can easily integrate with one another,” Collie said. “What’s new here is the idea of adding volatility to the list of factors driving the variation.”

-- This article first appeared on Money Management Executive.