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4 Strategies for Investing in Volatile Markets

June 22, 2020

Market volatility and declines in equity prices have many investors questioning how to navigate the risks and opportunities based on their financial and investment situation. Keep in mind your investment strategies should align to what's important to you along with your risk comfort level. Here are some actions for investors to take into account during this market volatility.

1. International Markets

A focus on diversification can, in our view, be helpful in navigating ongoing volatility. We believe the eventual rebound will not be confined to domestic markets. Maintain an appropriate international allocation, favoring global equities over global fixed income and a larger exposure to developed markets versus emerging economies. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

2. Fixed Income

Bond markets’ role as a ballast during market turbulence will be a key focus this year. Bonds tend to move in different directions from stocks over time and can provide an important diversification benefit.

Whether you own individual bonds, bond mutual funds, UITs or ETFs, as an asset class, bonds can provide diversification, income and stability to your overall investment portfolio. We recommend owning a variety of equities and bonds of varying maturities, including investment grade corporate and high-yield bonds as appropriate, to help cushion market swings. Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.

3. Systematic Investing

Consider systematic investing and rebalancing instead of trying to time the bottom. The sharp pullback in stock prices presents an opportunity for investors to use excess cash targeted for future investments and potentially benefit from this decline over the longer term.

Systematic investing is the process of investing a fixed dollar amount at regular intervals. While sys-tematic investing does not guarantee a profit or protect against loss, it helps investors buy more shares when prices are low and fewer shares when prices are high. This typically results in a lower average cost per share than if a constant number of shares are purchased at set intervals. It is fitting for investors who wish to:

  • Invest gradually over time
  • Accumulate more shares when prices drop
  • Lower the average purchase price of their investments

4. Portfolio Rebalancing

As unsettling as daily market swings can be, volatility is part of investing. Ignoring short-term daily fluctuations and systematically aligning asset allocation weightings to match risk tolerance through rebalancing can help you maintain the mix of bonds and stocks appropriate for your situation and help cushion the impact of heightened volatility over the long term, regardless of its source. By focusing on quality and diversification using a wide variety of asset classes and rebalancing them regularly, you can build and maintain a solid portfolio designed to help withstand the market’s swings over time.

As you work with your financial advisor to determine the mix of stocks and bonds that align your portfolio with your goals, our Investment Policy Committee’s (IPC’s) investment pyramid can help you organize your decisions and understand how a wide variety of asset classes play particular roles in an appropriately diversified portfolio.

1 Alternative investments and stocks trading less than $4 align with the Aggressive investment category, but they are not recommended.

2 Large-cap stocks that do not pay a dividend are in the Growth investment category.

Diversification does not guarantee a profit or protect against loss in declining markets.

The one constant investors can expect is change, which is why it's important to regularly review your investment strategy with your financial advisor. Working together, can help you ensure your investment strategy remains aligned to your goals and that you stay on track.

More Resources:

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