With more equity volatility on the horizon, what’s an investor to do?

Wealth


As the wise, old sage Yogi Berra once said, “When you come to the fork in the road, take it!”

That simple advice doesn’t apply for today’s investor, because the market offers several fork-in-the-road options for risk-minded individuals.

As the economy strengthens and the U.S. equity market hovers at near-record levels, investors are faced with a conundrum: Should they take some equity risk off the table to avoid a (potential) pullback? Or should they stay fully invested and ride the (possible) wave?

It has never been easy to answer these questions with certainty, and now is no exception. But today investors may be better equipped with new tools to help them navigate these challenging questions and invest wisely.

It is well known by now that bonds are not quite the risk refuge they had been the last 30 years or so. As the Federal Reserve continues to raise rates, bond prices may fall in the coming months and years. Hardly the kind of derisking investors may be seeking.

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And if riding that wave seems like the best way forward, here’s another note of caution: A large part of the U.S. equity market’s gains over the last several years has been concentrated in only a handful of names.

The likes of Facebook, Amazon, Netflix and Google (Alphabet) — the FAANG stocks — have powered many portfolios’ returns. I’ve observed that as these relatively few stocks have grown in size, they have become an ever-larger proportion of passive strategies. With these companies trading at or near record highs, there is little room to be wrong. High-flying stocks such as these tend to get pummeled amid any signs of slowdown.

I believe that heightened equity volatility may be on the horizon.

So what’s an investor to do?

Let’s start with the bad news. There are no easy answers here. Most investors can make a case for several ways forward. Stay invested in equities; seek to reduce risk; generally avoid bonds. But what investment strategies can potentially reconcile these seemingly conflicted views?



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