A confluence of various market events in the current environment is making for a volatile 2022 for investors. The CBOE Volatility Index is up over 30% as inflation fears and geopolitics are adding to an investor’s plate of worry.
“There are three main issues eating away at financial markets at the moment. The first is war—markets are worried about the financial market and geopolitical implications of the war in Ukraine, which this week almost included a default on two dollar debt repayments by Russia,” a William Blair article notes. “The second is commodity price volatility—markets are concerned that the massive volatility in commodity markets will break something, leading to major financial market instability.”
“And the third is that the Fed and/or high oil prices could induce a recession—markets fear that we are heading straight for a recession, given that both spikes in oil prices and Fed tightening cycles have historically been catalysts for recessions,” the article adds.
One way to help mitigate the effects of volatility is to concentrate less in a portfolio or, in other words, reduce concentration risk with an equal-weight strategy.
Avoid Putting All Your Eggs in One Basket
It can be easy to fall into the trap of allocating too heavily into one or more stocks to extract maximum gains, such as big tech heavy-hitters like Apple or Amazon. In the midst of heavy sell-offs, investors could experience large drawdowns when they’re too heavily exposed to certain stocks.
This is especially the case when it comes to the S&P 500. Extreme concentration risk could result when investors leave themselves vulnerable by investing too much in the index’s top holdings.
“As the S&P 500 has grown ever more top-heavy, many investors in products tied to the Index have found themselves facing historic levels of concentration risk, the likes of which passive investors have not seen since 1970 — half a century ago. Such a high concentration in the S&P 500’s top five holdings potentially leaves investors vulnerable in the event that the companies’ current high valuations fall back to earth,” the Invesco website notes.
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