Well, folks, volatility has certainly dominated our stock markets for the last two months. Unlike the measles, the pundits aren’t sure if we will experience it again soon. Rather than guess, a review of our defensive strategies for more volatility makes sense today. Just to clear up several concepts before we start, volatility happens when valuations are too high or too low. What is too high or low is not always easy to recognize at the onset, but we all seem to be somewhat startled when we find ourselves caught in such a period. Being always prepared for a correction in advance is just a smart strategy that can diminish the shock value and potential portfolio decline during negative periods with excessive volatility.
- A regular review of your asset allocation can reveal opportunities to strengthen your portfolio's durability in market declines. The standard 60/40% allocation to stocks and bonds is still considered a sound concept to prevent losses during selloffs while achieving growth over time, with the 60% allocated to equity. However, today many accounts/investors use primarily mutual funds to direct their investment. Little additional investor care is put into reviewing the specific holdings in each individual fund. Using bank loan funds as an example, the credit quality of funds-specific holdings can contribute to losses or gains based on the qualitative standards set for loan inclusion. Individual loans can suffer as individual company or industry conditions deteriorate, or with the economy as a whole during a general contraction. A credit review of a bank loan funds portfolio rating can tell a lot. The bottom line is: bank loan funds, when compared, can reveal a meaningful difference in underwriting standards among the top participants. It is generally believed in the investment industry that stronger underwriting standards will avoid losses and produce better investment results in this asset category over time.
- Stock funds have a few shortcomings that investors should be aware of as well. Most major investment companies produce a book covering all investment offerings they have. It is a pretty useful tool once you're used to reading them.
- You can usually get this from the firm you're investing with. For starters, long-term returns are displayed if they are competitive. You may also find how well the particular strategy has worked against an appropriate benchmark in both up and down markets. Compare some of your favorite funds this way and you can discover one more useful tool to improve your fund choices and add to your investment return. Best and worst years results are the ingredients that measure volatility. High portfolio volatility is believed to generally diminish returns in funds and should be overlooked for better choices.
- Learn from the winners. Warren Buffett uses down markets as an opportunity to add or expand to companies with a durable advantage. I think it's safe to say that his acquisition targets have already been picked before the down markets arrive. Many investors today might already own those companies right in their own portfolio. Look hard at what you already own either individually or in a mutual fund. If you like what you own, start setting aside a small amount of uncommitted funds so that you can buy some of the best ideas you already own during the next sell off, whenever that might occur.
- Prevailing interest rates are still quite low which includes a good portion of the bond market. Extending out maturities doesn’t give you much for your money but certainly increases market and issuer risk over time. However, the recent stock market selloff or reset, as I would call it, cut the prices of some of our best U.S. companies with a global footprint. These same companies are currently paying dividends annually between 3 and 4% with a long history of yearly increases. It is clearly a way to add current income to your portfolio and certainly provides an opportunity to provide growth as well.
- Meaningful progress has been made on the China/U.S. trade deal, which includes no new tariffs on either country for the next 90 days. China has also agreed, as a condition of the proposed deal, to a substantial increase in the purchase of U.S. products including agricultural goods.
*Asset allocation programs do not assure a profit or protect against loss in declining markets. No program can guarantee that any objective or goal will be achieved. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met.