Preparing For The Return Of Volatility

technical bounceThink 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.

Obormot / Shutterstock

Obormot / Shutterstock

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.

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