Preparing for the return of volatility
Think markets have calmed? As BlackRock's Heidi Richardson suggests, the stage is still set for more volatility, and there are steps investors can take to prepare for it.
Although markets have been relatively stable the last couple of weeks, that doesn’t necessarily mean the turbulence we’ve seen this year is behind us. After all, the catalysts for the volatility we saw in January and February are still here: excess supply putting pressure on oil prices, disappointing earnings, and slowing global growth. Add to this a highly unusual election season in the U.S. and uncertainty surrounding China and the stage is set for volatility to remain with us in 2016.
In times like these, the temptation for investors is strong to run to the sidelines and exit the market. But it is very difficult to time the market and miss out on rallies if – or when – they occur. Instead, look for potential opportunities that may help strengthen a portfolio, and seek some stability and growth in these constantly changing markets.
Specifically, here are three actions to consider in these markets:
Seek ballast with short duration bonds
Shorter duration bonds, or bonds that mature within three years, can potentially offer a portfolio stability during market volatility. Historically, we have seen short duration bonds have a lower correlation to stocks, which can be a beneficial ballast when equity markets are down. Additionally, bonds typically generate regular income for investors, which can potentially help stabilize portfolios when equity markets decline.
Focus on high quality companies with growth – or income – potential
As volatility increases and returns are harder to come by, investors should consider looking to high quality companies, which may be better positioned in this difficult environment, as well as dividend growers, which potentially may offer steady income. When we say “high quality” companies, we are referring to companies characterized by high profitability, steady earnings, and low leverage. This may seem obvious, but we are looking for financially healthy companies that can weather the markets and volatility. Additionally, exposure to companies that have the potential to sustainably increase dividends over time may be an opportunity to target steady growth – as well as income that can help provide some buffer from volatility.
Look for growth opportunity abroad
Despite slowing global growth, there are attractive potential opportunities outside the U.S. For example, Japanese stocks continue to offer relative attractive valuations, especially in comparison to other developed markets. Additionally we believe the Bank of Japan will continue to deliver market-friendly monetary easing policies in 2016 similar to the stimulus from QE and shareholder-friendly activities we saw in 2015.
Overall, we expect volatility to be ongoing throughout 2016, making it potentially a more difficult environment for investors. But it is important to keep it in perspective, focus on your long-term objectives without fleeing to the sidelines at the worst moment, and keep an eye out both for opportunities – as well as ways to strengthen your portfolio.
Exchange traded funds (ETFs), such as the iShares Short Maturity Bond ETF (NEAR), the iShares MSCI USA Quality Factor ETF (QUAL), the iShares Core Dividend Growth ETF (DGRO), and the iShares MSCI Japan ETF (EWJ), can provide access to short duration bonds, high quality companies, and Japan.
Heidi Richardson is Head of Investment Strategy for U.S. iShares.
Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
The iShares Short Maturity Bond ETF will invest in privately issued securities that have not been registered under the Securities Act of 1933 and as a result are subject to legal restrictions on resale. Privately issued securities are not traded on established markets and may be illiquid, difficult to value and subject to wide fluctuations in value. Delay or difficulty in selling such securities may result in a loss to the iShares Short Maturity Bond ETF. The fund may invest in asset-backed (“ABS”) and mortgage-backed securities (“MBS”) which are subject to credit, prepayment and extension risk, and react differently to changes in interest rates than other bonds. Small movements in interest rates may quickly reduce the value of certain ABS and MBS. NEAR is an actively managed fund and does not seek to replicate the performance of a specified index. Actively managed funds may have higher portfolio turnover than index funds.
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