The stock market indexes have been throwing curve balls at investors for most of the year. Just when market sell-offs appear to be subsiding and making way for rallies, the bear market re-establishes itself, which makes a low-volatility strategy imperative in the current market environment.
From a financial advisor’s perspective, this means having to insulate portfolios from volatility well before it strikes. In other words, financial advisors need to read the hand of the market before the cards are revealed.
“An optimal portfolio is well-diversified and built with future bear markets already assumed,” a Financial Post article said. “Bear markets are a regular part of economic cycles. Financial advisers should be making this clear to clients before they occur, not reacting after the fact.”
Every investor is different, but a plan to combat volatility applies to all. This is especially the case for retirees where large market downturns can take a sizeable bite out of a portfolio, which is the last thing retirees want to worry about in their golden years.
“From a portfolio level, this means that, within the parameters of an individual investor’s situation and goals, maximizing the expected risk-adjusted returns while keeping volatility to the absolute minimum possible,” the article added. “This is especially important for retirees, or those nearing retirement, who cannot risk large dips in their portfolios.”
A Solution to High Volatility
One option to consider is an exchange traded fund (ETF) that accomplishes the objective of muting volatility when it strikes. Consider the American Century Low Volatility ETF (LVOL), which gives investors exposure to active management, meaning that portfolio managers can check the pulse of the markets and get in or out of positions depending on how the market is behaving.
This dynamic exposure comes at a low-cost expense ratio of 0.29%. The fund screens for asymmetric, or downside, volatility and invests in companies with strong, steady growth.
Key features of the fund as presented on the product website:
- Emphasizes strong fundamentals to limit potential risk of speculative companies with questionable profits.
- Expands risk measures beyond volatility to capture other downside and balance sheet risks.
- Focuses on volatility at the portfolio level as well as the individual stock level.
- Uses a rebalancing strategy that actively responds to changing market conditions.
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