Navigating the Rapids: Preparing and Protecting Your Portfolio for Market Volatility

If you have ever gone whitewater rafting, you understand the anxiety when approaching a set of strong rapids that test your nerves until you hit the calmer waters further downstream. One can view market volatility in much the same manner given the inherent characteristic of investing. Periods of sharp declines and rapid ascents can test even the most seasoned investors.

However, proactive preparation and protective strategies can significantly mitigate the impact of market fluctuations on your portfolio. Much like having a raft guide assisting you down the swiftly flowing river, it is important to leverage your financial advisor to help navigate the turbulence. Rather than succumbing to fear during times of market uncertainty, adhering to the well-defined plan structured with your advisor can empower you to navigate volatility with more confidence.

1. Building a Foundation of Diversification

Diversification remains the cornerstone of portfolio protection. By spreading investments across various asset classes, sectors, and geographic regions, you reduce the risk of a single asset's poor performance significantly impacting your overall portfolio.

This includes allocating investments across stocks, bonds, real estate, and potentially alternative assets like commodities or private equity, depending on your risk tolerance and investment goals. Within the stock portion, further diversification across different market capitalizations (large-cap, mid-cap, small-cap) and sectors (technology, healthcare, consumer staples) is essential.

As part of our multiple strategies, we incorporate diversification to help mitigate concentration risk while also providing opportunities to capture positive returns across multiple sectors, sub-sector industries, and capitalizations.

2. Asset Allocation and Rebalancing

Establishing a strategic asset allocation that aligns with your risk tolerance, time horizon, and investment objectives is crucial. As you are aware from your initial collaboration with your advisor, it is critical to determine your overall risk tolerance, investment timeframe, and overall objectives to determine the best course of action to assist in attaining your financial goals.

Once established, regular rebalancing is essential to maintain your target allocation. Rebalancing is also a key component in helping to lower the overall volatility of your holdings, but rebalancing does not necessarily need to be on a set timeframe. Often, if you are rebalancing, you are reducing positions in names that have outperformed and adding the funds raised to the names that have underperformed.

There are cases where this makes sense, but there are times when tactical rebalancing is a better option. By this, we mean that you can trim positions that have grown organically while not fully reducing the holding to the modeled percentage. For example, stock X is currently at 12% of your total account value, and it is still expected to perform well in the near future. If the model called for a 6% holding, a full rebalance would time the position by 6%. By contrast, a tactical rebalance would allow for trimming the position to 9% thereby reducing the concentration, maintaining a core holding to take advantage of potential upside moves, and freeing up the 3% for reinvestment in names that have underperformed.

3. Maintaining a Cash Reserve

Holding sufficient cash is a component of portfolio protection during volatile periods. This cash buffer provides liquidity to take advantage of potential buying opportunities during market downturns, when asset prices may be significantly discounted. It also provides a safety net to cover unexpected expenses without having to sell investments at unfavorable prices.

The size of your cash reserve should be determined based on your circumstances, including your risk tolerance, spending needs, and emergency fund requirements. This is something that should be discussed with your financial advisor to make sure that you have the cash available to meet expenses in the short term.

That said, we must note that maintaining excessive cash balances can work against you as you could experience cash drag which is a point where maintaining large levels of cash can potentially lower the performance of your overall portfolio. As of this writing, we are still in a period where cash equivalents are still providing relatively attractive returns, but this may not always be the case, so it is important to discuss with your advisor to determine the best course of action.

4. Staying Informed and Maintaining a Long-Term Perspective

Our mission is to ensure that you focus more on your life and worry less about your money. That said, we provide you with information concerning market trends, economic data, and geopolitical events to better understand the potential volatility (we highly encourage you to read/listen to the information that we provide).

We also believe it is crucial to avoid reacting emotionally to short-term market fluctuations. Instead, we maintain a long-term perspective and focus on the investment goals that were established between you and your advisor. Remember that market downturns are a normal part of the investment cycle, and historically, markets have recovered and reached new highs. Often, the volatility in the markets provides great zones of opportunities to invest in high-quality names that may have pulled back in valuation.

5. Regularly Reviewing and Adjusting Your Plan

Your financial situation, risk tolerance, and investment goals may change over time. Therefore, it is essential to regularly review and adjust your portfolio protection plan accordingly. This includes reassessing your asset allocation, risk management strategies, and cash reserve levels.

By communicating with your advisor, you are better able to develop a revised strategy that continues to meet your long-term financial goals.

Final Thoughts

Our Investment Committee and Strategists are behind the scenes monitoring the markets and taking strategic/tactical actions during periods of volatility. The overarching goal is to build a resilient portfolio that is better equipped to withstand market volatility and successfully generate alpha which can assist in achieving your long-term financial goals.

Remember, proactive preparation and a disciplined approach are key to navigating the inevitable ups and downs of the market and maintaining Financial Peace of Mind. We look forward to seeing you at our upcoming events!