Managing Volatility—A Little Planning Goes a Long Way
Recent market volatility has prompted many advisors to mount an aggressive stance against portfolio risk. But a better time to address risk and volatility is during portfolio construction. Being proactive, rather than reacting to market conditions, can position client portfolios to limit downside losses and participate in the prospective upside.
A Toolbox to Manage Risk
Many investors don’t give serious consideration to managing risk and volatility until deep in the throes of a market correction. But waiting to address it then often makes them adopt a too-conservative investment stance that limits their ability to achieve the positive long-term returns required to meet their goals. Properly managing “tail risk”—the level of volatility that corresponds to large portfolio losses—should begin when the portfolio is being structured. Advisors have several arrows in their quiver, among which are diversification, alternative assets, low-beta equities, and crisis planning. Combining these strategies can both limit the portfolio’s downside loss potential and position it for long-term returns.
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