Very few investors realize how much their portfolio value is being affected
by portfolio volatility.
I think it would be better to choose an allocation that delivers the required return, and learn to deal with (ignore) the emotions invoked
by portfolio volatility, rather than to determine the optimum allocation to the second decimal, only to find out it changes from month to month.
Not exact matches
Part of the reason to have bonds is to have stability on days like this; government bonds provide that stability, and they're acting like they should act,
by providing that cushion to the equity
volatility in your
portfolio.
Judging
by the investments that are underperforming so far this year, the supposedly safe - haven assets — the ones you counted on to keep your
portfolio stable during periods just like the current one, when market
volatility surges — are turning out to be not so safe after all.
The industry got a jolt recently when the California Public Employees Retirement System announced it was lowering its historic 7.5 percent expected rate of return in an effort to reduce
volatility in its
portfolio caused
by reaching for risk.
Dollar cost averaging is an investment strategy designed to reduce
volatility in a
portfolio by purchasing an investment in fixed increments, rather than all at once.
Even with low yields and rising interest rates, bonds still tend to do their job
by dampening
volatility and minimizing losses for the overall
portfolio.
By hedging, the
volatility of a
portfolio holding foreign securities is reduced.
By putting 20 % each in the three just mentioned asset classes, then 20 % in high dividend stocks and 20 % in low
volatility stocks, I got to a
portfolio with 5.2 % income at 4.8 % vol.
Competitive long term risk adjusted returns can be achieved
by controlling downside risk and reducing overall
portfolio volatility.
This diversified
portfolio, represented above
by the orange circle, delivered good returns with a digestible amount of
volatility, compared to
portfolios that contained only one, two or three asset classes.
It also adjusts for risk (defined
by modern
portfolio theory metrics that look at
volatility measures) and accounts for sales charges that can detract from performance figures.
Both weighting schemes target 10 %
portfolio volatility by each month applying overall leverage based on actual annualized
volatility of an unleveraged trend following
portfolio over the past 60 trading days divided
by 10 %.
Let's look at the costs of an actively managed
portfolio designed
by a financial advisor to provide higher returns with lower
volatility than the corresponding benchmark.
However, stocks»
volatility should be tempered
by adding fixed - income elements to a
portfolio.
Also, you can assemble your DGI
portfolio to have less
volatility (beta) than the index
by a higher allocation to stocks in consumer staples and utilities sectors.
By contrast, high - quality bonds such as those found in investment - grade corporate funds like the iShares 1 - 3 Year Credit Bond ETF (CSJ A-89) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD A-66), etc.), or in Treasury
portfolios such as the iShares 1 - 3 Year Treasury Bond ETF (SHY A-97) or the iShares 10 - 20 Year Treasury Bond ETF (TLH B - 65), etc.) tend to buffer
portfolio volatility to a much greater degree.
One of my favorite tools for potentially reducing
portfolio volatility and drawdown is to use the 10 month simple moving average strategy, popularized in recent years by Mebane Faber in The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear
portfolio volatility and drawdown is to use the 10 month simple moving average strategy, popularized in recent years
by Mebane Faber in The Ivy
Portfolio: How to Invest Like the Top Endowments and Avoid Bear
Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets.
For instance if your retirement relies solely on a stock
portfolio, then market
volatility likely is much more of a risk than a situation where your retirement will be supported
by income from several different vehicles with varying degrees of correlation to market ups and downs.
A
portfolio with a beta of greater than 1 would generally see its share price rise or fall
by more than the market, while a
portfolio with a beta of less than 1 would have less share price
volatility than the market.
While some observers will point to recent equity market
volatility as a sign that investors should remain defensive when selecting stocks in the region, Philippe Brugere - Trelat, executive vice president and
portfolio manager, Franklin Mutual Series ®, says he's encouraged
by recent developments.
I think that
by having an internationally diversified
portfolio, the total
volatility is reduced and the earning potential is increased.
The chart below, based on data from the classic book A Random Walk Down Wall Street
by Burton Malkiel, shows how adding a third or seventh or fifteenth position to a
portfolio materially reduces the
volatility of returns.
Building a
portfolio consisting of low - risk assets is achieved primarily
by using one of two principal low -
volatility strategies.
While all this doom and gloom can seem daunting, we believe investors can best seek to reduce
volatility and capture opportunities in their
portfolios by keeping it simple and focusing on two key things:
However,
by the time a
portfolio has twenty or so holdings, the incremental reductions in
portfolio volatility from new holdings is very small.
Portfolio Margin uses a risk - based model that determines margin requirements based on historical volatility by valuing a specific portfolio over a range of underlying price and volatili
Portfolio Margin uses a risk - based model that determines margin requirements based on historical
volatility by valuing a specific
portfolio over a range of underlying price and volatili
portfolio over a range of underlying price and
volatility moves.
Thus, the ETF industry has evolved to offer precise
portfolios to deal with this
volatility, slicing the credit spectrum and segmenting
by maturity.
It could be investor
by investor, but having a significant portion of your bonds and your equity
portfolios invested in non-U.S. securities, certainly in our mind, is very, very important to reduce long - term
volatility to the
portfolio.
The
volatility that rocked the markets in January cut my
portfolio's value
by approximately 10 %, but dividend payouts were the second highest ever.
TODAY»S TOPIC: 3 Overlooked (But Simple) Ways to Boost
Portfolio Returns Hosted
By: Dominique J. Henderson, Sr., CFP ® (Send me an email) Get Alerts at: Link to Show Episode (For mobile users) February was a rough month in the markets... lots of
volatility... And just in case you might be thinking what happens if the markets take -LSB-...]
Volatility is measured
by standard deviation, which indicates how much a
portfolio's returns vary from year to year.
By holding roughly equal amounts of Canadian, U.S. and international stocks, you can reduce the
volatility of your
portfolio without lowering your expected return.
The
volatility of the fund, measured
by the standard deviation of monthly returns, was slightly higher than that of the reference ETF
portfolio.
The PowerShares S&P 500 Low
Volatility Portfolio ETF, another one of the largest funds in the category
by assets, is down only 5.3 per cent.
Let's look at the costs of an actively managed
portfolio designed
by a financial advisor to provide higher returns with lower
volatility than the corresponding benchmark.
The Über - Tuber trailed the DFA
portfolio by just half a dozen basis points annually, and it accomplished that result with a lower standard deviation — which means lower
volatility.
Similarly, applying this method to a global
portfolio with four asset classes and rebalancing monthly, would have generated gains of 12.1 % per year, beating the classic Couch Potato
by 2.1 percentage points per year and with only a little more
volatility than the regular version.
I also don't mind seeing extreme
volatility in my
portfolio with market swings, and have been successful
by buying during dips in the markets.
By adding this fund, we are able to construct a
portfolio with the risk level ---- in other words, the
volatility one would expect ---- closer to what you'd normally expect to see in a
portfolio that contains 50 % stocks and 50 % bonds.
Note 1 USAA Smart Beta Equity ETFs provide a distinctive way to combine value and momentum factors and seek to balance risk across each ETF
portfolio by equalizing the
volatility contribution of each security.
Our approach is based on Modern
Portfolio Theory, introduced
by the Nobel Prize - winning economist Harry Markowitz, who proved you can minimise
volatility (risk) and maximise reward (money!)
The recent Chinese stock market crash and resulting
volatility of the world's markets had an impact on my
portfolio's value, dropping it
by about 8 %.
By combining growth and value in a
portfolio, you can achieve good results while holding down
volatility.
Portfolio risk is not simply the sum of the
volatility of the individual assets; it is also influenced
by the correlation between those assets.
The risk as measured
by the
volatility of the
portfolio returns expressed in annualized terms is far less for dividend paying stocks than it is for non-dividend paying stocks.
Portfolios are designed to consistently reflect an investor's risk requirements in all markets and to outperform their benchmarks
by protecting capital in two ways: first, under normal market conditions, with
volatility within historical averages, diversification is used to control risk; second, when
volatility is historically high or low, PŮR uses a proprietary SmartRisk ™ strategy.
The attribution analysis goes one step further
by dividing the return of the covered call
portfolio into four categories: market risk (S&P 500 and delta return), lottery risk (theta and gamma return), ex ante
volatility risk (vega return), and other option risks.
However, a good active manager may have been able to limit the impact of the downside
volatility by hedging the
portfolio or moving positions to cash.
When modern
portfolio theory was first formulated, it was assumed that risk was captured
by volatility — and the surprise with small stocks was that their outperformance was larger than could be explained
by volatility alone.