At AWP, we want our clients to have an understanding of portfolio risks and market dynamics in order to alleviate some of the anxiety that comes with investing. It’s important to know that volatility refers to the increase and decrease in the value of investments over time. While some level of fluctuation is normal, high volatility can lead to investors making irrational, emotional decisions causing them to lock in excessive losses when the market dips.
As part of ongoing communications with clients, we employ Nitrogen’s Risk Number system to identify the historical volatility both inside our client portfolios, and compare it to each client’s individual behavioral and situational tolerance. The Risk Number questionnaire for clients is used at regular intervals in our review process and helps us determine the proper portfolio allocation for the appropriate level of risk and volatility in each clients’ portfolio.
Take a free questionnaire to determine your Risk Number.
Open Riskalyze Questionnaire
Additionally, there are strategies that can help to manage volatility and reduce the risk of large swings in a portfolio’s value. Here are a few of the methods we use:
Diversification: Don’t Put All Your Eggs in One Basket
Diversification is a well-known strategy that involves spreading your investments across different types of assets and industries. For instance, if you invested only in technology stocks, a downturn in that industry could cause significant losses (Tech Bubble in the early 2000s). However, if you spread your investments across a balanced portfolio in other uncorrelated sectors like energy, healthcare,retail, and real estate, those sectors might outperform technology’s downturn, balancing out the losses from tech. This approach reduces the risk that one event will negatively impact your entire portfolio, helping to stabilize returns and create more consistency in portfolio performance.
Dollar-Cost Averaging: Invest Consistently Over Time
We often say that time in the market beats timing the market. Dollar-cost averaging is a strategy where you invest a fixed amount of money at regular intervals, regardless of what the market is doing. This reduces the risk of trying to time the market by either holding cash too long and missing buying opportunities, or rushing to buy when prices are elevated. For example, if you invest $100 every month, you’ll sometimes buy more when prices are low and less when prices are high. Over time, this approach helps smooth out the cost of investments and can lead to better long term results, while also reducing the emotional impact of market volatility.
Rebalancing: Keeping Your Portfolio on Track
Over time, the value of some investments in your portfolio will grow more than others. This can cause your portfolio to become unbalanced, meaning you might have a higher portion of your assets invested in a particular stock or sector than was planned, bringing an unintended concentration risk. Rebalancing allows us to periodically adjust your portfolio back to its original mix of assets, maintaining the portfolio’s intended level of risk – and often creating a pattern of “buying low and selling high.”
Considering Lower-Risk Investments
While stocks have the potential for higher returns, they can also come with more potential volatility. Incorporating lower-risk investments into your portfolio, like bonds, ETFs (pooled funds), or high quality dividend paying stocks will serve to not only diversify your full financial profile, they can provide regular income, which can help cushion the impact of negative price swings. Additionally, keeping cash on hand or in a high yield money market fund allows investors the ability to access funds without having to potentially generate taxable income, or adversely impact their portfolio at the wrong time. Excess funds can also be deployed opportunistically when market prices decline. It puts you, the investor, in the driver’s seat controlling your destiny, instead of you being controlled by the market.
WORK WITH US
Let us help you manage volatility.
Managing volatility in your portfolio doesn’t have to be complicated. By diversifying your investments, using strategies like dollar-cost averaging and rebalancing, and keeping a long term mindset, we can help you smooth out the cyclicality of the market. Remember, some volatility is normal in investing, but with these strategies, you can keep your portfolio on a more steady path.
