As the brainy, old sage Yogi Berra once said, “When you come to the fork in the passage, take it!”
That simple advice doesn’t apply for today’s investor, because the trade in offers several fork-in-the-road options for risk-minded individuals.
As the economy supports and the U.S. equity market hovers at near-record levels, investors are faced with a conundrum: Should they assume some equity risk off the table to avoid a (potential) pullback? Or should they interruption fully invested and ride the (possible) wave?
It has never been mild to answer these questions with certainty, and now is no exception. But today investors may be gamester equipped with new tools to help them navigate these challenging assuredly questions and invest wisely.
It is well known by now that bonds are not quite the gamble refuge they had been the last 30 years or so. As the Federal Spare continues to raise rates, bond prices may fall in the coming months and years. Just the kind of derisking investors may be seeking.
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And if riding that wave seems like the overpower way forward, here’s another note of caution: A large part of the U.S. fairness market’s gains over the last several years has been crowded in only a handful of names.
The likes of Facebook, Amazon, Netflix and Google (Alphabet) — the FAANG founders — have powered many portfolios’ returns. I’ve observed that as these extent few stocks have grown in size, they have become an ever-larger allotment of passive strategies. With these companies trading at or near history highs, there is little room to be wrong. High-flying stocks such as these look out for to get pummeled amid any signs of slowdown.
I believe that heightened fair-mindedness volatility may be on the horizon.
So what’s an investor to do?
Let’s start with the bad news. There are no undemanding answers here. Most investors can make a case for several course forward. Stay invested in equities; seek to reduce risk; on average avoid bonds. But what investment strategies can potentially reconcile these apparently conflicted views?
The good news is that investors have access to a newer generate of investment strategies that were designed with these chances in mind. Available in exchange-traded fund packaging, which offers humiliate cost and tax-efficient exposure to equities relative to traditional active shared funds, investors have access to strategies that may allow them to put in with more confidence in this environment.
Consider the broadening sort of single- and multifactor investment strategies. Ranging from the tactical to long-term vital, these strategies may warrant investigation.
Certain single-factor ETFs, such as low-volatility master plans, seek to deliver exposure to equities with historically lower gamble. The thinking behind them goes like this: Investing in stockpiles whose prices have been historically less volatile may transfer a smoother ride during times of market instability. While this may be an true belongings strategy in certain environments, some of the ETFs may also introduce other gambles, such as sector concentrations or valuation risks that can occur as a by-product of a single-factor heart. Look for options that take these risks into account.
As the identifies suggests, multifactor strategies seek exposure to more than one consideration and may include value, quality, momentum, size and low volatility.
So what is the theory behind these strategies? Certain factors perform better in unalike markets, and diversification across multiple factors may smooth the ride. Not all of these schemes are alike. Some comprehensively manage other risks, such as sector and homeland diversification. Still others may seek to reduce volatility, offering another possible line of defense in the equity portfolio.
While there certainly is no such apparatus as a free lunch, investors should be encouraged by the range of available investment master plans that comprehensively evaluate risks and make sensible choices in avocation of capital growth. It’s these kinds of multifactor strategies that can nick investors navigate a lifetime of forked-road investment conundrums.
With a long-term investment vista, staying invested is the most important thing. Seeking ETFs that oversee some of the risks may give you the confidence to do so.
— By Bill Hoyt, head of inspect/portfolio management at Hartford Funds