How Can You Safeguard Your Investment Portfolio Against Increased Volatility?

This year will be different, investors understood. However, they’ve now been taught precisely how extra it’s going to be. The Federal Reserve of the U.S is likely to move on interest rates in 2022, but most experts don’t foresee the five rate rises being priced in it. Although inflation was rising, we are now witnessing considerably more extensive and more persistent price rises. People are shifting their investments away from growth-oriented tech businesses and into value equities or undervalued stocks. Banks are now predicting weaker growth in the coming months. All of this is causing a surge of unpredictability that hasn’t been witnessed since the beginning of the pandemic age.

In January, the Nasdaq Composite experienced its worst month in nearly two years, plunging 9%. Massive intraday reversals made it impossible for regular traders to time the market, as they had gotten accustomed to purchasing dips only to see them rise again during the previous two years. Until late January, ordinary investors were full of optimism, fueling speculative excesses in everything from cryptocurrency to meme stocks. Both, though, have been on a declining trend for months. In addition, volatility indicators are currently considerably over 12-month norms due to changes in the situation in Ukraine.

“It’s a new investing regime,” said Ben Laidler, global market strategist at eToro. “The things that have done well in a previous couple of years certainly aren’t going to perform well in the next couple of years.” “Interest rates are rising, growth is slowing, returns will be smaller, and volatility will increase.” “This is the new normal.” So, how does this affect your portfolio? Investors who understand how to profit from market shifts can benefit from fresh possibilities. Those who don’t — or believe they do but are misinformed — will suffer the consequences. Bloomberg News asked financial advisors and other professionals for their top recommendations for navigating current volatile markets.

Here are their professional opinions.

When tech stocks were on the rise, putting 70% of your portfolio in them could have seemed like a good idea. But what about on Feb. 3, when Meta Platforms Inc., Facebook’s parent firm, had the worst stock market wipeout in history, wiping out $251 billion in value? The stock had risen 127 percent from March 2020 to early January this year, making it a standout of the epidemic era.

Inflation and Fed policy expectations have roiled stock markets. Such drastic transformations are possible under the right circumstances. However, an investor who discovers that they’ve overstated their risk tolerance during a downturn may become their own worst enemy. A classic error is selling into a downdraft, locking in losses, and then sitting out the market’s ultimate comeback. There are a number of basic things you can do to keep your anxieties in check. According to Randy Bruns, senior financial planner at Model Wealth in Naperville, Ill., behavioral finance research has indicated that those who check their portfolios regularly have a stronger impression of investing as hazardous. In addition, if someone contains their account more frequently, the chances of spotting a loss are higher. According to studies, if an investor glanced at their portfolio every day, there was a 25% probability of noticing a moderate loss of 2% or more. However, if you check quarterly, your chances of finding a loss like that have dropped to 12%.

Looking at portfolio returns in percentages rather than dollars might help lessen the impact of a loss. “A 3% ‘paper’ loss from a million-dollar portfolio while the Nasdaq is down 15% may be appropriate and in line with your goals,” Bruns said. On the other hand, you can create barriers if you just can’t quit looking at your portfolio. For example, limit and StayFocused are two Chrome extensions that you may use to limit the amount of time you spend on a particular website. According to Ashton Lawrence, a financial adviser with Goldfinch Wealth Management in Greenville, S.C, allowing your spouse to access your account login credentials is another option that might work if both sides agree.

Most investors are aware of the advantages of diversification. Spreading your money across several businesses, broad sectors, or nations reduces the chance of losses in a single region. Moreover, losses may be much less foreseeable in a turbulent market. Few, for example, could have predicted Meta’s historical decline.

The problem is that many investors believe they are well-diversified. But delve further into a portfolio, and you’ll discover more of the same, exact, same. “The narrative around the S& P 500 is one significant misperception regarding volatility,” said Craig Toberman, founder of Toberman Wealth in St. Louis. “The S& P 500 is generally referred to as a market-cap-weighted index. That is, the index does not have a built-in rebalancing function. As a result, when stocks rise in value, they take on a larger part of the index’s composition by definition.” This implies that an exchange-traded fund (ETF) that tracks the index — frequently regarded as a particular method to diversify by investors — might be weighted toward the more giant corporations. Toberman points out that the top 10 businesses currently account for almost 30% of the Vanguard S& P 500 ETF. Many of these businesses are in the technology sector, including Meta, Apple Inc., Microsoft Corp., and Tesla Inc.

ETFs aren’t the only ones. Many Americans believe their retirement accounts are diverse, yet they are strongly weighted in technology. According to Bloomberg statistics, many mega-cap tech stocks account for more than 45 percent of some of the most popular retirement funds.

Toberman advises investors to choose S&P funds that are “equal-weighted.” Every stock in these funds is just 1/500th of the total weighting. This indicates that the top ten people own only 2% of the fund. Because they require more management, such funds may have higher costs than their market-cap-weighted rivals, according to Toberman. Another option is to purchase smaller firms to balance out those with excessive valuations.

The term ‘low volatility should be used with caution.

Other exchange-traded funds purport to shield investors from large market movements, but their performance varies. Stocks in the “low-volatility ETFs” have traditionally had the slightest fluctuation in price and are often weighted in defensive sectors like utilities and consumer staples. However, depending on why the market is sliding, those may not do well. For example, when the pandemic struck in 2020, low-volatility ETFs fared poorly as investors shifted their focus to tech equities and other work-from-home beneficiaries.

This year that may change. “If we’re in a market where investors are hiding in Meta and Alphabet, this ETF isn’t going to perform well,” said Todd Rosenbluth, CFRA Research’s head of ETF and mutual fund research. “However, if investors seek refuge in businesses such as Procter & Gamble and Pepsi, this ETF will do considerably better.” Late last year, two of Invesco’s major low-volatility ETFs, the S&P 500 Low Volatility ETF (SPLV) and the S&P 500 High Dividend Low Volatility ETF (SPHD), trailed the S&P 500. However, they outperformed it at periods in 2022.

A class of funds known as “buffer ETFs” might aid individuals who seek extra protection against losses, but there’s a caveat. These funds, also known as defined-outcome funds, employ options to smooth out fluctuations over a certain period, generally a year. As a result, you will not be required to cope with complex options strategies independently. However, if equities rise, you may miss out on significant gains. “Covered call ETFs,” which invest in stocks while employing options to produce a consistent income stream, is another alternative. “They may be a replacement for fixed income since they’re built to last longer and provide the income you desire,” Rosenbluth explained.

Bonds are making a comeback, considered a safe choice when stocks falter but better than cash. Short-term bonds, which typically mature in one to five years, appeal to Rosenbluth because they are less susceptible to rising interest rates.

He remarked, “They’re a terrific location to put your money and stay liquid while earning a little bit of revenue.” In addition, long-term bonds are a favorite of Noah Damsky, a financial adviser with Marina Wealth Advisors in Los Angeles. “I’m purchasing because I think the interest rate curve will flatten if the Fed starts raising rates as aggressively as the market expects,” he explained. In either scenario, Elliot Pepper, a financial adviser and director of tax at Northbrook Financial in Baltimore, advises against using them as a total cash substitute and having some dry powder to make movements might help investors take advantage of unforeseen opportunities, even if inflation will erode the value of their money.

“The ability to put that money to work for you is what distinguishes the financial superstars from the market riders,” Pepper added. Charles Schwab’s Liz Ann Sonders advises caution regarding TIPS, an increasingly popular form of bond. They’re short for Treasury inflation-protected securities, and they’re meant to safeguard investors from losing their money’s buying value. Given rising inflation, this may seem enticing, but they may have outlived their usefulness.

“We had a more favorable perspective on TIPS in the early phases of the inflation rise, but then they got so popular, and the price went up, and the returns went down,” said Sonders, the firm’s chief investment strategist.

Our houses are frequently our most significant financial investments. Properties may typically serve as good inflation hedges since they are tangible assets. In addition, in most cases, real estate values act as an excellent counterbalance to stock market volatility since property prices fluctuate less than fashionable securities. However, with many nations’ property markets remaining hot, real estate may be out of reach for typical investors. That’s why real estate investment trusts, or REITs, are an excellent way to gain some property exposure in a portfolio. REITs specialize in different sorts of buildings, such as apartments, prefabricated homes, and warehouses. REITs must distribute 90% of their taxable revenue to stockholders as dividends to avoid paying federal taxes.

The REITs that have “roofs above heads,” according to Cedrik Lachance, director of global research at real-estate research and consultancy company Green Street, has the most confidence since the residential component of REITs tends to be a solid inflation hedge. He noted that single-family housing REITs, prefabricated homes REITs, and senior housing REITs are now the most attractively valued. Because a large portion of a REIT’s dividends are taxed at ordinary income rates rather than the lower, longer-term capital gains rate that applies to the so-called qualified dividends that an investor might receive from owning individual stocks, putting REITs in a tax-deferred IRA or 401(k) often makes sense.