Combating Market Volatility
Financial markets are off to a challenging start this year as high inflation and rising interest rates have impacted both the stock and bond market. But at a time when news headlines and investors appear focused on the negative outcomes, we’re here to discuss some proactive moves investors can make to combat market volatility.
This year’s decline in both stocks and bonds has been painful for passive investors. Year-to-date a traditional portfolio of 60% stocks and 40% bonds has declined more than 10%, which is on pace for its worst year since 2008.
However, with the right professional financial advice, investors can be making proactive portfolio adjustments to better suit the current market environment.
Some of these adjustments might include implementing positions that benefit from higher inflation, shifting equity exposure from previous leadership to areas of the market that are emerging as winners in this new environment, and focusing on dividend stocks and higher yielding bonds.
Within equities, for over a decade, investors have been able to rely on growth areas of the stock market for leading market returns, however, now these areas such as consumer discretionary and technology are showing early signs of a possibly dimming return outlook.
While those areas may be challenged, prospects for other areas of the market appear to be brightening. These include areas such as the natural resource/energy sector, companies with less economically sensitive businesses (such as tobacco, food producers, and large-cap pharmaceutical companies), and companies that pay consistent dividends.
To that point, a diversified portfolio of dividend stocks can offer investors a dividend yield of 3 to 4%, with the potential for dividend increases over time. Because dividends have represented 40% of the stock market’s return over the past century, we continue to focus on income an important component of total return.
And sticking with a focus on income - as a result of price declines this year, high quality corporate bonds now offer investors a yield (interest rate) of nearly 4.00%, versus only 1.75% a year ago. So, for the first time in several years, bonds are offering reasonable interest rates for investors.
But, as always, diversification, and a team approach remain important. If you’re concerned about market volatility and want to learn more, or just have questions about your portfolio or retirement, we’re here to help. Give us a call!
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