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Instability is increasing. Here’s how to keep your portfolio safe.

(Bloomberg) — Investors knew this year would be different. But lately, he’s been getting a lesson in how different it’s taking shape.

Most analysts expected some action on interest rates from the US Federal Reserve in 2022 — but that probably isn’t the five rate hikes they’re pricing in now. Inflation was clearly trending upward, but we are seeing much, much more consistent price growth. People are moving their money away from growth-led tech companies and toward those in the price range, or stocks that are considered undervalued. And banks are now forecasting slower growth in the coming months. All this is creating a wave of volatility that has not been seen since the beginning of the pandemic era.

January was the Nasdaq Composite’s worst month in nearly two years, falling 9%. Massive intraday reversals have made it difficult for retail traders – who have become accustomed to buying dips over the past two years only to see them rise again – to time the market. As of late January, confidence was running high among the retail crowd, who have fueled speculative excesses in markets ranging from cryptocurrencies to meme stocks. But both are trending down since months. And now, changes in the situation in Ukraine are keeping the volatility gauge well above the 12-month average.

“This is a new investment regime, and things that have done well over the past few years are probably not going to do well in the next couple of years,” said Ben Ladler, global market strategist at the eToro platform. “Interest rates are going up, growth is going to slow down, returns are going to go down, and there’s going to be more volatility. This is the new reality.”

What does this mean for your portfolio? Investors who know how to take advantage of market changes tend to benefit from new opportunities. Those who don’t – or those who think they do but are wrong – stand to lose. To help guide you through these changing markets, Bloomberg News polled financial advisors and other experts for their best tips for retail investors. Here’s what he told us:

Check Your Risk Tolerance

Putting 70% of your portfolio in tech stocks when they were going up would have been great. But what about a day like February? On October 3, when Facebook’s parent company Meta Platforms Inc. suffered the largest wipeout in stock market history, valued at $251 billion. The company has been a star of the pandemic era, climbing 127% from March 2020 to early January this year.

The conditions are rife for such dramatic changes. Yet an investor who finds in the midst of a recession that they have lowered their tolerance for risk can become their own worst enemy. The classic mistake is selling in a downdraft and closing in on losses, and then sitting out by the market’s final rebound.

There are some easy ways to keep your nerves under control. Behavioral-finance studies have shown that the perception that investing is risky is heightened among people who check portfolios frequently, said Randy Bruns, senior financial planner at Naperville, Ill.-based Model Wealth.

Basically this is because if they check it more often then their chances of seeing a loss in the account are high. If an investor looked at his portfolio daily, the odds of seeing a modest loss of 2% or more were 25%, the research showed. But on a quarterly basis, the probability of facing such loss fell to 12%.

One way to limit how painful the loss can be is to look at portfolio returns in percentages, not dollars. “While a $30,000 loss may sound catastrophic, a 3% ‘paper’ loss from your million-dollar portfolio when the Nasdaq’s 15% down may be reasonable and in line with your goals,” Bruns said.

If you can’t stop checking your portfolio, you may be building up odds. There are Chrome extensions you can download to allow yourself to spend on a certain site, such as Limit or Stayfocused. Another idea that can be effective — as long as both parties voluntarily consent — is to allow your spouse to control your account login information, said Ashton Lawrence, a financial planner at Goldfinch Wealth Management in Greenville, SC. said.

Make sure you are as diverse as you think you are

Most investors know the benefits of diversification. Spreading your money across industries, broad sectors or different countries helps reduce the risk of loss in a particular sector. In a volatile market, the loss estimate may be even lower. For example, some might say that they witnessed the historical decline of Meta.

The trouble is that many investors may think they are diversified. But dig under the hood, and you’ll find similar, similar, similar across portfolios.

“A big misconception about volatility is the story surrounding the S&P 500,” said Craig Toberman, founder of Toberman Wealth in St. Louis. “The S&P 500 is ‘market-cap-weighted’ as it is commonly discussed.” That is, there is no rebalancing feature built into the index. When stocks go up in price, they, by definition, take up a large part of the composition of the index.”

This means that an exchange-traded fund that tracks indexes — often viewed by investors as a surefire way to diversify — can be heavily weighted toward the largest companies. Toberman points out that right now in the Vanguard S&P 500 ETF, the top 10 companies make up more than 30% of the fund. Many of those companies are in the tech sector and this includes not only Meta but also Apple Inc., Microsoft Corp. and Tesla Inc.

It’s not just ETFs. The many retirement funds that many Americans believe are diversified are heavily technology-weighted. A handful of mega-cap tech stocks make up more than 45% of retirement plans from some of the most popular funds, according to data compiled by Bloomberg.

Toberman recommends that investors consider S&P funds on an “equal-weighted” basis. Within such funds, each stock carries only 1/500th of the weighting. This means that the top 10 hold just 2% of the fund. Toberman said such funds can have higher fees than their market-cap-weighted peers because they require slightly more management.

Another thing to consider when buying smaller companies is balancing those with very high valuations.

Beware the ‘Low Volatility’ Label

Other exchange-traded funds claim to provide protection against wild market swings, but they have varying degrees of effectiveness.

“Low-volatility ETFs” include stocks whose prices have historically fluctuated the least, usually heavily in defensive sectors such as utilities and consumer staples.

But they may not do well depending on why the market is falling. When the pandemic broke out in 2020, low-volatility ETFSs underperformed as investors turned to tech stocks and other work-from-home gainers.

That may change this year.

“If we’re in an environment where investors hide in Meta and Alphabet, this ETF isn’t going to do well,” said Todd Rosenbluth, head of ETFs and mutual fund research at CFRA Research. “But if investors hide in companies like Procter & Gamble and Pepsi, this ETF will do a lot better.”

The two largest low-volatility products — the S&P 500 Low Volatility ETF (SPLV) and the S&P 500 High Dividend Low Volatility ETF (SPHD) from Invesco — outperformed the S&P 500 at the end of last year, though they outperformed at times. . 2022.

For those who want additional protection against losses, a class of funds called “buffer ETFs” can help. These products, also called defined-results funds, use options to smooth out drops over a fixed time period, usually a year. You will not need to deal with complex option strategies yourself. This means, however, that you could miss out on big gains if the stocks go up.

Another option is “covered call ETFs,” which invest in equities using options to generate a steady income stream.

“They can be a replacement for fixed income because they are designed to hold better, and it gives you the income you want,” Rosenbluth said.

Define your bond time-horizon strategy

Bonds are back in fashion, seen as a safe bet when equities struggle but are better than cash.

Rosenbluth is a fan of short-term bonds, which typically mature in one to five years, as they are less sensitive to rising interest rates.

“They are a good place to park your money and stay liquid and earn a little bit of income,” he said.

Noah Damsky, an investment advisor at Marina Wealth Advisors in Los Angeles, is a fan of long-term bonds. “I’m buying because I expect the interest rate curve to flatten once the Fed starts raising rates as the market is pricing in,” he said.

In any case, don’t use them as a full cash substitute, said Elliot Pepper, a financial planner and tax director at Northbrook Financial in Baltimore. Even if inflation eats away at the value of your cash, having some dry powder to make the move can help investors take advantage of unexpected opportunities.

“The ability to put that cash to work for you, that’s what separates investment superstars from people who are just going to ride the market,” the paper said.

Liz Ann Saunders at Charles Schwab urges caution over an increasingly popular type of bond: Tips. Short for Treasury inflation-protected securities, they are designed to protect investors from a decline in the purchasing power of their money. This may sound tempting given the high level of inflation, but their moment may pass.

“We had a more positive outlook on TIPS in the early stages of rising inflation, but then they became so popular, and that drove the price up and reduced yields,” said Saunders, the firm’s chief investment strategist. ,

rethink real estate

Our homes are often our biggest investments. As real assets, assets can often act as a solid hedge against inflation. And most of the time, real estate prices act as a healthy check against stock-market volatility as property prices swing less than trendy equities.

Nevertheless, with the housing market still red-hot in many countries, real estate can be out of reach for average investors. That’s why experts recommend getting some property exposure in a portfolio through real estate investment trusts, or REITs, which focus on a wide variety of properties, from apartments to manufactured homes to warehouses. REITs must pass 90% of their taxable income to shareholders as dividends to avoid paying federal taxes.

Cedric Lachance, director of global research at real-estate research and advisory firm Green Street, believes most in REITs that are “head-over-roof” because the residential component of a REIT is a good inflation hedge. REITs that focus on single-family housing, manufactured homes or senior housing now have the most attractive prices, he said.

Since most REIT payments to shareholders are taxed at ordinary income rates — rather than the lower, long-term capital gains rate that applies to so-called qualified dividends that an investor might get from owning individual shares — a Owning a REIT in a tax-deferred IRA or 401(k) often makes sense.

To contact the authors of this story:
Charlie Wells in London [email protected]
Claire Ballantine at New York [email protected]
Susan Woolley in New York [email protected]

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