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Lower the volatility in your client’s portfolio

We’re seeing more market ups and downs than we have in years – here’s how you can even out the ride.


Date: March 15, 2016

You’re not imagining things – markets have been more volatile in 2016. For advisors, though, it does take some imagination to make the journey smoother for clients.

“This is definitely more volatile than what is normal,” says Ryan Lewenza, senior vice-president and private client strategist at Toronto’s Raymond James Ltd.

The increase in ups and downs has been a result of two main things: continued uncertainty over global growth, and persistent weakness in oil and other commodity prices, says Mr. Lewenza.

There’s also an unusual amount of worldwide political risk, including this year’s head-scratcher of a United States presidential election and the United Kingdom’s scheduled June 23 referendum on whether to remain in the European Union.

Not surprisingly, market swings and dips usually makes clients nervous. When they say they’re concerned about volatility, what they really mean is that they’re worried about not achieving their goals, losing capital or both, says Sandra Foster, a CFP and financial author.

Advisors have to somehow keep their clients focused, while making them realize that markets do rise and fall.

“While you can reduce volatility, you cannot eliminate it, and your clients need to understand this,” she says. “Otherwise, they always want to sell at the wrong time.”

Asset mix review

Still, there are ways that advisors can reduce volatility in a client’s portfolio. The first step is to review a client’s asset mix and see, based on their reaction to market swings, if they’re too heavily weighted to equities, says Mr. Lewenza.

“If the portfolio is down in excess of 10 per cent and your client is really nervous, that tells me that the client has too high a portion of equities in the asset mix,” he says.

In that case, “what you need to do is look at the asset mix, reduce [the percentage of] equities and buy more bonds.”

Mr. Lewenza is partial to high-quality, investment-grade corporate bonds. Corporate spreads are high relative to government bonds, he says, and he doesn’t see a recession, which could impact corporates, coming anytime soon.

Consider cash

While adding more fixed income to a portfolio will lessen those ups and downs, some firms are going even further by holding more cash.

Robert Jukes, global strategist and head of GPS Optimized Portfolios for Canaccord Genuity Wealth Management, says his firm has been predicting prolonged volatility since mid-2015.

As a result, his firm’s client portfolios “have been positioned into more than 50 per cent cash, thereby reducing exposure to all risk assets, with a focus on capital preservation,” he says.

Altering a portfolio’s volatility can really only be done by reducing the client’s exposure to the stock market, says George Christison, a Vancouver Island-based financial planner and founder of IFM Planning Services.

“If you want a portfolio to be less volatile, then more of it needs to be invested in cash, bonds and GICs,” he explains.

However, advisors who aim to decrease a portfolio’s volatility should also consider rebalancing as “a disciplined and regular activity,” says Mr. Christison. He says to focus on the portfolio’s volatility, not the volatility of individual investments.

“I once worked with a portfolio manager who said that if a portfolio holds 16 investments, at any point in time, four will exceed your expectations, four will disappoint and eight will be doing just fine. His advice was to not micro-manage the individual investments,” he says.

Go into gold, but watch out for resources

Some investors curb ups and downs by putting some money into gold. The yellow metal tends to rise in unstable market environments. You don’t want to put too much in the commodity, though.

Mr. Lewenza has about five per cent of his assets in gold in his managed account, which is the weighting most advisors recommend.

“When you go through times of instability and high volatility, safe-haven assets always make sense,” he says. “It’s a form of insurance.”

Advisors may also want to think about avoiding resource-based cyclical industries and, for the time being, emerging markets, which are both unpredictable and add currency exposure.

“If you want less volatility, why add the volatility that comes from foreign-exchange, foreign-market and cultural risks to your portfolio?” says Mr. Christison.

Also consider “comfort” stocks, says Mr. Lewenza, such as grocery companies, entertainment operations and telecoms. These stocks swing less because even in a volatile economy, “people still need to buy Doritos,” he says.

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