Even the best investors worry in a volatile market

Uncertainty in the market is creating anxiety but investors who are contemplating changing investment strategies to combat potential interest rate volatility should seriously reconsider.
MAY 13, 2014
Uncertainty in the market is creating anxiety but investors who are contemplating changing investment strategies to combat potential interest rate volatility should seriously reconsider. While it might feel natural to chase high-performing stocks and shift asset allocations at the first indication of economic turmoil, it's actually one of the biggest mistakes investors can make. That tactic flies in the face of the financial maxim about buying low and selling high. The key to surviving volatility is not to fight the tide, but to hold a portfolio through multiple market environments. That means diversifying across asset classes and investment strategies, and resisting the urge to let emotions dictate decisions. VOLATILITY: THERE'S NO CRYSTAL BALL With the big shift out of bond and into equity funds that catalyzed the S&P 500's extraordinarily strong showing last year and some of its best five-year numbers on record, many investors reacted by riding that wave. But it's impossible to predict which asset class will lead the others from year to year. Investors should bear in mind that there is little consistency in market leadership, as today's top-performing asset classes may be the bottom performers tomorrow. Equities were the market leaders in 2013, with the Dow Jones Industrial Average hitting 52 all-time highs — the most since 1996. In general, when equities are performing well, fixed income tends to have lower relative returns. Conversely, when equities experience negative returns, fixed income tends to see better relative returns. Significant volatility has been present since 2000 in the U.S. equity market and even more so in international markets. International equities not only lost more than U.S. equities during that time, but hadn't fully recovered their losses by the end of 2013. This wasn't the case, however, for fixed income, which benefited from the declining interest rate environment. But last year, as the tide started to turn, a 100-basis-point increase in rates resulted in a negative return. The increasing pressure on rates to rise could mean serious head winds for fixed income. Nevertheless, the power of fixed income as a portfolio diversifier remains critical. This is best illustrated by the example of a 60/40 portfolio, with 40% U.S. equities, 20% international equities and 40% U.S. fixed income. Since 2000, the biggest loss on that portfolio was approximately 35%, compared with -54.6% for global equities. By adding the fixed-income allocation, the portfolio was able to reduce the biggest loss and the time it took to recover. SEEK DIVERSIFICATION AT EVERY LEVEL But investors shouldn't stop there. They should also seek strategy diversification within the asset class allocations mentioned above. For instance, within your equity allocation or within your fixed-income allocation, you should be diversified across individual investments. The goal, in the end, is to get the best return for the risk taken. Nearly every quarter, investors should be dissatisfied with one part of their portfolios. If they're not, they're not diversified. Those who do it successfully will find they can concentrate on building wealth instead of worrying about taking on risk to make up losses. Zoë Brunson is director of investment strategies for AssetMark Inc.

Latest News

SEC charges Chicago-based investment adviser with overbilling clients more than $2.5M in fees
SEC charges Chicago-based investment adviser with overbilling clients more than $2.5M in fees

Eliseo Prisno, a former Merrill advisor, allegedly collected unapproved fees from Filipino clients by secretly accessing their accounts at two separate brokerages.

Apella Wealth comes to Washington with Independence Wealth Advisors
Apella Wealth comes to Washington with Independence Wealth Advisors

The Harford, Connecticut-based RIA is expanding into a new market in the mid-Atlantic region while crossing another billion-dollar milestone.

Citi's Sieg sees rich clients pivoting from US to UK
Citi's Sieg sees rich clients pivoting from US to UK

The Wall Street giant's global wealth head says affluent clients are shifting away from America amid growing fallout from President Donald Trump's hardline politics.

US employment report reactions: Overall better than expected, but concerns with underlying data
US employment report reactions: Overall better than expected, but concerns with underlying data

Chief economists, advisors, and chief investment officers share their reactions to the June US employment report.

Creative Planning's Peter Mallouk slams 'offensive' congressional stock trading
Creative Planning's Peter Mallouk slams 'offensive' congressional stock trading

"This shouldn’t be hard to ban, but neither party will do it. So offensive to the people they serve," RIA titan Peter Mallouk said in a post that referenced Nancy Pelosi's reported stock gains.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.