Many investors may be facing a catch-22 situation in their portfolios. Recent strong returns in the global bond market may have pushed their fixed income weighting beyond their strategic allocation. But the return of equity market volatility may leave them wary of re-allocating their bond gains into stocks.
While stocks have been volatile, financial headlines have become more focused on when the next recession and market correction will hit.
Investors nearing retirement may feel it is imprudent to maintain a high allocation to equities, yet they may need the growth potential equities offer to reach their retirement objective.
In my discussions with advisors across Canada, I repeatedly hear that their pre-retiree clients can’t accept the risk of losing 20% to 30%, for example, as they have fewer years to recoup those losses.
Fortunately, there is another way to maintain their growth potential. Low volatility equity investing aims to mitigate losses during market sell-offs, while participating in rising market environments.
Simply put, I characterize the goal as “winning by not losing.”
Recall the danger posed by catastrophic losses: if an investment declines by 30%, the investor will need a 42.8% to recover from that loss before any new growth occurs. A low-volatility portfolio can offer the potential for much smaller declines, which may allow the investor to recover more quickly.
Market downturns can come out of nowhere. We saw this in fourth quarter of 2018, when the S&P 500 Index dropped nearly 20%.1 A lot of investors were not positioned for that. While the bounce back was rapid, it raises the question of how a slow recover would affect investors.
A low volatility sleeve within their overall equity allocation would have partially protected an investor in this downturn. It’s can serve as a protective element within the equity portfolio, reducing a conservative investors reliance on fixed income to fulfil that role.
While a recession is hard to predict, economic data points to slowing global growth. In a slower economy, you may still see periods of market volatility – while the overall market direction may appear flat, there could still be ups and downs. A low volatility strategy will partially protect in the down periods and participate in the up periods. This gives it the potential to outperform the broad market in what might appear to be a sideways market.
Learn more about Invesco’s low volatility lineup:
- Invesco S&P 500 Low Volatility Index ETF – CAD (ULV.C)
- Invesco S&P/TSX Composite Low Volatility Index ETF (TLV)
- Invesco S&P Emerging Markets Low Volatility Index ETF (ELV)
- Invesco S&P International Developed Low Volatility Index ETF (ILV)
- Invesco S&P 500 Low Volatility Index ETF Fund
- Invesco S&P/TSX Composite Low Volatility Index ETF Class