Globe Advisor is moving, click here to see

Advisor SunLife

photo: volatility2

How to take advantage of volatile markets

Market fluctuations have investors feeling queasy, but with the right products and portfolio mix, volatility can be an advantage


Date: April 28, 2016

Up and down, and down and up. Driven by a mix of factors that include fluctuating commodities prices, plunging oil stocks and China’s fizzling-out economy, North American and global markets continue their roller coaster ride, leaving even seasoned investors with a queasy stomach.

“We have seen many series of market volatility in recent years,” says Kari Holdsworth, vice-president, individual wealth at Sun Life Financial in Waterloo, Ont. “Because of this recurring volatility, Canadians are more conscious of their risk tolerance and are aligning their asset allocation with their comfort level.”

Canadian investors certainly appear to be proceeding with greater caution these days. In Sun Life’s 2014 Unretirement Index, a survey conducted by Ipsos Reid that tracks Canadians’ attitudes and expectations about retirement, close to 40 per cent of Canadians said they were taking less risk in their portfolio compared to the period preceding the financial crisis of 2008. Just over 55 per cent said they were taking the same amount of risk, while only six per cent said they were taking more risk today than they were before the 2008 crash.

“Today, many Canadians are asking themselves, ‘Can I withstand the impact of a shock now if there’s a big correction, and what type of asset allocation should I put in place to ensure the right level of exposure?’” says Ms. Holdsworth.

Given the correlation between risk and reward in investing – where the general rule is higher returns for greater risk – some investors may assume that opting for lower-risk investments as a way to mitigate market volatility will mean a portfolio that grows more slowly.

That doesn’t have to be the case, says Ms. Holdsworth. With the right products and portfolio mix, investors can use volatility to their advantage.

In an ideal scenario, investors would harness volatility by selling their stocks at peak prices and then putting money back into the markets when prices are low. This captures the growth cycle and avoids the downturns.

George Athanassakos, professor of finance at Western University’s Ivey Business

School in London, Ont., says investors who adopt this value-focused approach to investing tend to be less affected by the ups and downs of financial markets. But they also need to have the patience and discipline to hang on when the value of their assets goes south.

“If you have long-term horizon, short-term volatility does not matter,” says Prof. Athanassakos. “In fact, we like short-term volatility as it allows us to buy low.”

Most investors, however, don’t have the expertise required to make the right buy-or-sell calls at the right time. This is where an experienced financial professional can come in, notes Ms. Holdsworth.

“Many investors are addressing market volatility by allowing professional fund managers to make the calls on if and when to move the assets in their portfolio,” she says. “In a managed portfolio, you don’t have to be actively making decisions but instead place your reliance on a financial professional. Some funds, for example, have a low volatility mandate using derivatives to potentially protect against volatility.”

Ms. Holdsworth points to Sun Life products that are designed to preserve investors’ wealth even as markets fluctuate, including ones that automatically reset the investment’s lifetime guaranteed income, maturity benefit or death benefit each year. This automatic annual reset is also available on certain Sun Life income products, says Ms. Holdsworth.

“With these products, investors can feel assured that a portion of their portfolio is covered against market volatility,” she says. “We know this is important to Canadians.” Ms. Holdsworth points to the 2015 Sun Life Canadian Unretirement Index survey, where 98 per cent of respondents said it was important to them to have some of their retirement income guaranteed for the rest of their lives.

How long the current cycle of volatility will last is a question with no sure answers; some experts predict the market will remain unstable until the end of the decade. Having a solid financial plan in place will help investors ride out the turbulence and perhaps even come out ahead, says Ms. Holdsworth.

“Canadians today are thinking more carefully about which portions of their portfolio to expose to investment risk,” she says. “The best way to determine this is by working with an advisor who can help put together a plan that includes strategies for harnessing and protecting against market volatility.”

Advisor SunLife


photo: later-needs Balancing future needs with ‘right now’ needs photo: buildingportfolio Building the right portfolio

powered by Globe Edge