Despite the National Bureau of Economic Research announcement that the recession ended in June 2009, there remains enough uncertainty—including high unemployment, unconventional monetary policy and unsustainable fiscal projections—to fuel volatility.

These conditions have already pitted gold against Treasury yields, stretching the price of gold and 10-year Treasury yields in opposite directions. Furthermore, the humbling “flash crash” of May 2010 portends that if all else goes right, the market’s infrastructure itself may result in unexpected surprises. What can an investor do to prepare for this volatility?

01Focus on the asset class allocation decision. Of all the decisions made when one creates a fully diversified portfolio, only a few drive the majority of risk-reduction benefits.

Decisions that include the allocation to return-seeking (higher volatility) assets as opposed to lifestyle-hedging (lower volatility) assets are the primary drivers of risk reduction. Diversification across an adequate number of securities within the return-seeking bucket is assumed, with concentrations in any one security significantly increasing risk.

Many of the other diversification decisions, such as allocation across major marketable equity asset classes and sub-asset classes, may be of value during times of normal volatility, but have been shown to be of lesser benefit when really needed over the past decade.

02 Consider the “fat tail.” The mix of lifestyle-hedging and return-seeking assets is often established based on the investor’s comfort with the range of returns associated with a portfolio under a normal bell curve.

You can select an asset allocation that will help you sleep better at night if you understand that given the events of the past decade, along with expectations for the future, we may face more “worst-case” scenarios, and they may be of greater magnitude. This variation from a normal bell curve is called a “fat tail.”

03 Know what you are investing in. When markets turn south, illiquidity and leverage matter, and their combination can be particularly detrimental to portfolios. Of course, transparency, which many investors did not have going into the last recession, especially with hedge funds, was critical for understanding the degree of illiquidity and leverage on hand. Even when total transparency was available, investors were apathetic in their assessment of risk (e.g., disregarding the risks of residential

mortgage-backed securities), even underestimating dangers lurking in high-quality corporate bonds.

Investors absolutely must assess liquidity, leverage carefully and evaluate just how conservative certain assets really are, keeping in mind that many “safe” investments suffered in 2008.

04 Turn volatility into opportunity. Volatility may provide opportunities to implement a variety of investment and planning strategies:

• Reducing risk by diversifying low-cost-basis, concentrated stock holdings

• Transferring of wealth with tax-efficient strategies

• Managing the tax bite by capturing gains and losses

• Controlling risk through portfolio balancing

The past decade has highlighted the importance of protecting and enhancing wealth, which is often a risky venture. Few individuals have mastered the nuances of investment strategy in the best of times, fewer still in times of great volatility when downside risk is that much greater.

This also points to the advantages of leveraging the services of an investment professional who can offer independent and nonconflicting advisory services, especially in an era of continued volatility. Taking these appropriate steps to manage through and benefit from the volatility yet to come will help you achieve your investment goals.

Harris myCFO^® is a brand delivering services through Harris myCFO, LLC, an investment advisor registered with the Securities and Exchange Commission, and certain divisions of BMO Harris Bank, N. A., a national bank with trust powers. Not all products and services are available in every state and/or location.