Pattie Lovett-Reid: 3 portfolio strategies for weathering the market volatility
I’ve often subscribed to the mantra “don’t try to time the markets.” I truly do think it can be a mug’s game and getting it right twice – getting into and out of the market – can be a challenge for even the savviest of investors. However, you can’t blame an investor in this heightened period of trade tension and increased uncertainty for searching for the bottom in this market or tweaking their portfolio to help them sleep at night.
For those in a wealth accumulation phase who have good quality companies in their portfolio (companies with real earnings that not only pay a dividend but increase their dividend) with a reasonable time horizon of five-to-10 years, standing pat may be your best defensive strategy.
For those in a wealth protection phase, getting defensive might mean tweaking and timing your portfolio.
Here are a few strategies my husband and I have implemented with our own portfolio to provide some downside protection.
1. Increase but don't overweight your cash position. The market mounting trade tension has been an ongoing conversation in our home, and given all the uncertainty, we decided to have a little extra cash on hand to help alleviate some of the stress of having to sell out of position at exactly the wrong time and allows for buying and capitalizing on the fears of others.
2. Stick to lower-risk, dividend-paying stocks. We have stayed away from cannabis stocks, where although money has been made, we recognize money too has been lost. We have opted to keep the slow and steady approach front and centre, with lower risk dividend paying stocks hoping for lower volatility and higher dependability over time. Our focus is on companies with $100 million in market capitalization and 10-year track record of paying dividends. In other words: good quality companies that pay us to wait out the market fluctuations.
3. Consider Principal Protected Notes (PPNs). Recently, we purchased a PPN in an effort to secure principal protection, growth potential and diversification. This product combines the characteristics of both stocks and bonds. The distinguishing feature is that your principal investment is 100 per cent protected as long as you hold the PPN to maturity. Sure, it is possible that the underlying assets don’t perform and the consequence is no interest will be paid at all but the risk is less than investing directly. We recognize we won't get the full upside potential but the downside protection is worth it for now.
To be clear, I still believe timing the market is a difficult strategy when trying to beat market performance. However, ensuring you have the right asset allocation for who you are as an investor helps eliminate the “buy high and sell low” action an irrational investor does when they buy and sell based on the news of the day and emotions.
Knowing that others will make poor investment decisions during periods of volatility, tweaking your portfolio can help you weather a financial storm, preserve wealth –and maybe help you make a small profit along the way.