Pattie Lovett-Reid: How to protect your portfolio amid volatility
As investors remain edgy in the wake of geopolitical risks and tension mounts between North Korea and the U.S., many are wondering what the impact may be to their portfolios.
The challenge, of course, remains that we can’t always calculate the immediate response in the market – think back to Brexit and the U.S. presidential election. Both big events that had investors betting the uncertainty would lead to significant losses. In hindsight, that wasn’t the case in either scenario and great gains were seen in the market.
As we evaluate risk, it is important to note there is a difference between risk verses uncertainty. Risk can be measured, albeit not with 100 per cent accuracy, but if armed with the right data points, an investor can calculate a reasonable probability of an outcome.
Uncertainty can’t be quantified that easily. They are considered “black swan” events that fall completely outside the realm of the expected.
Tension between North Korea and U.S. isn’t anything particularly new to investors. In the past, there have been flare-ups that roil the markets for a day or so, before everything eventually settles down again. For some, the flare-up feels differently this time and traders have been on red alert as the mention of war has sent them running for cover.
So what is the average investor to do?
In times of uncertainty, it is so easy for investors to make bad decisions. Markets respond to surprise events with volatility and some investors may interpret volatility as a sign of trouble and flee to a perceived safe haven. The classic response – gold which has hit its highest level since June. Others however, will see buying opportunities at every turn. Something to consider, both are likely to fall prey to investing biases such as lack of diversification, believing past performance indicates future returns and leaning toward data that only supports our decisions.
Rather than responding emotionally, this may be the time to get back to basics.
Diversification is the most logical response, when dealing with a future, that is uncertain. Try to ignore market noise, rebalance if the composition of your portfolio is significantly misaligned to your goals, time horizon and tolerance for risk. And know with certainty there is always going to be uncertainty and sometimes a little pain when it comes to investing in the markets.
Diversification matters. The power of diversification however, does not ensure a profit or protect you against a loss, but it just might be the secret to investment success – only if you have the fortitude to stick with your plan.