Is your portfolio ready for an increase in volatility?
When the market hit maximum uncertainty in late 2008, volatility spiked to extreme levels. Since then volatility has declined substantially.
When the market hit maximum uncertainty in late 2008, volatility spiked to extreme levels. Since then volatility has declined substantially.
While there has been some sustained gradual global economic recovery, lead by emerging markets (and this is expected to continue), there are growing uncertainties being caused by Europe’s sovereign debt crisis that could play havoc with investors confidence, thus turning the trend in volatility.
In my experience, an increase in volatility tends to lead to a change in trend. We are almost 14 months into the up-trend that started in early March 2009.
If I have learned anything in my 28 years as an investment professional, it is that complacency is everyone’s enemy. We must always be on guard for the unexpected. While there is never absolute certainty that a trend will change, we must always be on guard for it. Most times, like in late 2008, you won’t know what hit you until it has already run you over!
So I preach diversity and balance as a portfolio protector from volatility.
Diversity across asset classes: bonds and preferred shares for yield, equities for growth. When equities don’t provide growth, bond income and preferred dividends will.
Diversity across global economies: emerging economies are leading the recovery, but US equities have been leading the stock market.
Diversity across company size: US small and micro cap companies are leading the US equity markets.
When you get “outperformance” by one asset class, then you rebalance to redistribute portfolio profitability to the underperforming sectors that will not remain underperforming forever.
Volatility will return, I can’t say exactly when, but when it does, be prepared!
I can help:
www.jstomenson.com
