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Managing risk in volatile times: you have options

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You may have already read about market cycles, learned more about your risk tolerance, and discovered the importance of having a plan when dealing with market volatility. 

But there’s still one question—how do these different strategies impact your portfolio? 

To help you ease the impact when markets are volatile, your advisor may recommend different types of funds and different solutions for your portfolio. Let’s take a closer look at some of the options. 

Low volatility funds

What are they?

Think of these funds as portfolios made up of some of the less volatile securities in a given asset class. For example, low-volatility stocks are shares in companies that are more stable and have more steady cash flow than the market as a whole - like utility companies. Footnote 1

Low volatility funds aim to provide better risk-adjusted returns than similar high-volatility stocks over time. (Think of risk-adjusted returns as the amount of risk involved in creating a return.)

Why might they be good in times of market volatility?

Low volatility funds tend to underperform the market on the way up and outperform it on the way down. This means when the market’s rising, they still provide you with returns, but these returns are lower than the market’s gains as a whole. When the market’s falling, these funds also experience losses, but they have smaller losses than the market as a whole. Overall, they offer less pain and less gain related to specific market events. By being less reactive to specific events, they tend to give you better risk-adjusted returns in the long-term. 

Dividend-paying stock funds

What are they? 

Funds that mainly invest in companies that pay dividends (profits companies share with their stockholders). Dividend-paying companies are typically well established and financially healthy, which can be a sign of strength and stability. 

Why might they be good in times of market volatility? 

Even when markets are volatile, companies generally keep paying dividends, and these dividends provide a bit of a cushion. Although the price of the underlying stock may fall when markets take a dip, you’re could still earn steady dividend income. 

Income-focused balanced funds

What are they? 

These funds diversify among two or more asset classes to give you a steady stream of income and long-term growth, with lower risk and volatility. They typically invest in bonds (lower-risk, fixed-income securities) and companies that pay dividends. The amount that these funds can invest into a given asset class usually has to stay between a set minimum and maximum value. 

Why might they be good in times of market volatility? 

Income-focused balanced funds focus on lower-risk investments and are designed to provide a smoother investing experience—something that might help a lot when the market’s volatile. They’re good solutions if you want the potential for more returns than a bond fund, but less volatility than an equity fund.  

Managed solutions

What are they? 

Managed solutions are portfolios that are built using a diversified mix of underlying funds, each of which is professionally managed. This category has become increasingly popular across the globe over the last decade as investors hope to simplify and diversify their investments into a single solution.  

Bringing together this mix of underlying funds uses strategic asset allocation. This means that behind the scenes, a professional portfolio manager decides how to allocate your investment across different asset classes (like fixed income or equities), sectors and regions. They allocate your investment based on what’s happening in the market, while staying within your risk tolerance. When appropriate, the portfolio manager may use their expertise to make small, strategic changes that have the potential to enhance your returns or lower your risk.

Why might they be good in times of market volatility? 

Managed solutions can help cut down any biases or emotional reactions you have when markets change. With these investments, you can work with your advisor to buy a fund (or funds) that’s specific to your needs.  From there, the fund’s portfolio management team works to make sure it fits your risk tolerance and diversification expectations. 

What’s next? 

The key to managing risk when markets are volatile is to work with your advisor to take a well-rounded approach. Although these different types of funds and solutions can help reduce risk in your portfolio, they won’t help you through volatile times alone. Your advisor can help you develop a plan that combines strategies and funds to help you invest with confidence, no matter the stage of the market cycle.

Footnote 1
1 Low volatility funds are in demand, once again. The Wall Street Journal. Nov. 4, 2019. https://www.wsj.com/articles/low-volatility-funds-are-in-demand-once-again-11572836820Opens a new website in a new window - Opens in a new window

This information is general in nature and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor. 

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