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Tips to Reduce Portfolio Fluctuations


Portfolio fluctuations are typically measured by what financial professionals call volatility.  Essentially, volatility looks at the amount and size of the up and downs of the market. With global growth slowing, increased political tensions in Europe, Asia and the United States, and especially as this 10 year bull market gets closer to it's end (there will eventually be an end), it's not a surprise that traders and many short sighted investors have become jittery, increasing the volatility of the markets.

Although volatility can provide some of the best opportunities for growth, allowing investors to purchase good companies at lower prices, not all clients need the best opportunities to live happy and successful lives.  A large part of our client base is already wealthy. They have taken their risks or saved their way to a fulfilling retirement. For them it's about staying wealthy. Volatility for these individuals feels like the opposite of opportunity; it's a threat.

For investors who either don't need to take risk or those who are uncomfortable with volatility, I thought it'd be helpful to suggest some ways to reduce or manage the fluctuations of your portfolio.  Moving from strategy to strategy typically won't work, but if you have a solid portfolio, minor tweaks can make all the difference.

Extend Time Horizon

One of the best ways to gain an advantage in the market is to truly take a long-term outlook on the investments you own. It's estimated that the average holding period of a stock is now less than year with many estimates suggesting it's closer to six months.  Stocks are in fact real shares of a business and I know very few businesses that have a straight up trajectory on their path to growth.  Your guess is as good as any expert's on what direction the market will go on the daily.  But extending your time horizon will stack the odds in your favour.  A recent article by one of my favourite financial writers provided the chart below, which shows the probabilities that the market was either positive or negative for a given length of time.

Don't Watch the Markets

This is especially true for individuals who are more emotional when it comes to fluctuations in their portfolios.  Nassim Taleb, the author of Fooled by Randomness dug further into the issue and provided information on what investors may expect based on how often they check their investments.  Investors who check daily have only a 54% chance of seeing gains, whereas if you reduce how often you check to an annual basis, you have a 93% chance of seeing gains.  The more frequently you check, the higher likelihood you will see something you don't like, increasing the chances of making knee jerk reactions that ultimately will eat into your wealth.  Not checking very often will not only help you to be a better investor, it will help you to feel better about your money overall.

Own Uncorrelated Assets

Having a broad mix of asset classes can really help smooth a portfolio.  As you can see from the chart below, in any given year it's a crap shoot on what asset class will be the best performing and which will be the worst.  By having a good mixture, you simplify your life and don't need to stress about what is going to be the best.  It's also helpful to add assets that perform very different from the stock market.  We've recently added positions to what's called a market neutral strategy. Without getting overly complex, essentially, it's a strategy that aims to generate modest returns regardless of the overall direction of the market.  It does this by betting on the market going up, and down.  No product or investment is a silver bullet, but as fluctuations increase, our clients sleep better at night knowing that we're playing good defence.

Cash Wedge

The cash wedge is a favourite strategy of ours for anyone close to, or in retirement who will be relying on their portfolio for income.  The idea is that we determine an annual amount that the client will need to draw and create three sleeves for this annual amount.  The first and second sleeve are invested in 1-year and 2-year GICs, with the third sleeve being invested in short-term high-quality bonds.  

If we go through a 2008-like downturn and the value of the investments drops, clients are able to draw their income for the year from the first sleeve.  By the end of the year if markets recover, we replenish our sleeves and continue on. If markets don't recover in a year, there is still our second sleeve and third sleeves to utilize.  Most of the time markets have recovered by either the end of year one or two and the third sleeve may never have to be touched.  This strategy allows clients peace of mind knowing their income will be less reactive to what happens in the markets.

As always anything written should not be taken as a recommendation. You should continuously review your portfolio with your existing advisor, and they should able to provide you a better idea of whether anything mentioned here has a place in your plans.

- Brandt Butt, Investment Advisor

Brandt Butt is an Investment Advisor at award winning firm Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Brandt Butt who is a Investment for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.


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