What to Do in Times of Volatility

Are you positioned for periods of volatility? Are you comfortable with a 10%, 20% or even 30% decrease in their portfolio value?

The market experienced a 10% drop in the mid-summer of 2024, which was a noticeable shift and garnered widespread attention. This change seemed to stem from the Japanese Central Bank’s decision to raise rates for only the second time in nearly two decades (disrupting the Yen carry trade), coupled with a weak U.S. jobs data. Shortly after, stocks surged as if in a bull market, up 27% year-to-date while bonds faced challenges amid speculations of potential Federal Reserve (the Fed) rate hikes. Prices of precious metals, like gold and silver, saw an uptick, possibly in anticipation of rate cuts.

Meanwhile, oil prices declined, signaling concerns of a possible recession. Mortgage rates rose, indicating a perceived strong economy, and home prices rose, hinting at a possible inflation comeback. Geopolitical tensions added more complexity, with conflicts between various regions, along with post-election uncertainties, tarrifs and the Fed contemplating its next rate-cutting move while eyeing inflation creeping back up.

In the midst of a perfect storm for potential volatility posed by national and global challenges similar to the events of 2024, how can individuals prepare to maneuver these changes effectively? Here are ten tips to help minimize portfolio volatility and brace for market unpredictability:

• Emergency fund: Individuals should set aside a portion of their income into an offset account such as a rainy day fund each month. In the event of a job loss or financial hardship, having available cash on standby can be critical. With this emergency fund or cash reserve, individuals can avoid the need to sell investments (potentially incurring taxes) to cover any immediate needs.
• Cash exposure: In addition to an emergency fund, shifting a portion of one’s portfolio into cash can help reduce risk and volatility. Cash remains unaffected by market fluctuations, offering stability and reassurance in a volatile environment and presenting opportunities for strategic investments.
• Long-term perspective: Whether someone is nearing retirement or is still years away from it, emotions come into play when market volatility impacts portfolio performance. This can cloud judgment and even lead to poor investment decisions. It’s important to remember that markets tend to recover relatively quickly — following the rule of 72, the market tends to double on average every seven to eight years — so it’s best to focus on the long-term perspective instead of the shorter-term market fluctuations. When in doubt, wait it out.
• Asset allocation: Individuals should also evaluate if their current portfolio is aligned with their risk tolerance and if their portfolio reflects their investment goals. A well-constructed portfolio will comprise a mix of equities, fixed income, some cash reserves and potentially some alternatives when appropriate. It is beneficial to rebalance portfolios regularly, as this can be especially powerful during periods of volatility.
• Diversification: It’s also valuable to diversify across and within different asset classes. Instead of focusing on single stock positions, consider lower-volatility index exchange-traded funds (ETFs) or mutual funds. Make sure to include exposure to international markets and other sectors for a well-rounded strategy.  
• Bond investments: Bond funds, treasuries and corporate bonds are generally less volatile than equities and can be a safe haven during more unpredictable periods. They also provide investors with a passive income stream.
• Dividend-paying stocks: Similar to bond investments, incorporating exposure to dividend-paying companies can help reduce volatility and provide additional income through dividends.
• Defensive stocks: Defensive equities (noncyclical stocks) are less correlated to economic cycles and can be considered another safe-haven investment. They are usually comprised of consumer staples, health care and utilities and tend to provide stable earnings even during a downturn.
• Hedging: Hedging is a risk management strategy that aims to reduce the risk of loss on an asset by purchasing or selling another investment. It can be as simple as swapping holdings within a portfolio or be more complex with options and derivative strategies.
• Professional advice: If building and monitoring a well-constructed portfolio tailored to meet specific investment goals seems daunting, or if the market’s constant ups and downs cause too much stress, then it might be wise to seek guidance from a financial advisor.

Ease your worries and achieve your financial goals. Let Weaver Capital Advisors prepare you now and for the future with investment management services and strategies tailored to your needs, so you can focus on what truly matters most. Contact us to learn more.

Written by: Oliver Bakker

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