Invesco Canada blog

Insights, commentary and investing expertise

Hussein Rashid | September 24, 2019

Can you reduce risk without raising your bond allocation?

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:

 

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1 Bloomberg.
Commissions, management fees and expenses may all be associated with investments in exchange-traded funds (ETFs). ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus before investing. Copies are available from Invesco Canada Ltd. at www.invesco.ca.
S&P®, S&P 500®, and S&P 500 Low Volatility Index® are registered trademarks of Standard & Poor’s Financial Services LLC and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by Invesco Canada Ltd.

LSTA® is a registered trademark of Loan Syndications and Trading Association and has been licensed for use by S&P Dow Jones Indices LLC and Invesco Canada Ltd.

TSX is a trademark of TSX Inc. (“TSX”) and has been licensed for use by S&P Dow Jones Indices LLC and Invesco Canada Ltd.

The S&P/TSX Composite Low Volatility Index, S&P 500 Low Volatility Index, S&P BMI International Developed Low Volatility Index, S&P BMI Emerging Markets Low Volatility Index, S&P 500 Equal Weight Index, S&P Europe 350 Equal Weight Index, and S&P/LSTA U.S. Leveraged Loan 100 Index (the “Indices”) are products of S&P Dow Jones Indices LLC, and have been licensed for use by Invesco Canada Ltd. Invesco Canada Ltd.'s Invesco Index ETFs are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, its affiliates, LSTA, or TSX and none of such parties make any representation regarding the advisability of investing in such product.

The opinions referenced above are those of the author as of Sept. 16, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.