Exiting a rocky market rather than sticking it out can often lead to worse results for nervous investors, says Jack Delany, quantitative portfolio manager with the multi-asset team at Dublin-based Irish Life Investment Managers.
Delany said the temptation to cut and run can be strong, but markets favour those who dare to stay invested.
“It seems like a really natural response when your portfolio loses value to reduce risk and wait for better times,” he said. “But we know that over the long term, this can be a very costly strategy.”
Secret weapon
Speaking on the latest episode of the Soundbites podcast, Delany said investors dig themselves into a hole when they de-risk their portfolio at a cost, and then fail to reap benefits during the subsequent recovery. Rather than pull money out of the market, he suggests investors use risk-mitigation strategies, which he described as the smart investor’s secret weapon.
“These can be either explicit risk-reduction strategies that purchase protection against an underlying asset, or implicit risk-reduction strategies that allocate to more defensive exposures or that dynamically manage exposures at different points in the cycle,” he said. “Both of these approaches, though, can be combined to manage losses and deliver a smoother return profile for investors.”
The most common strategy is also the most powerful: diversification across equities, bond classes, regions and currencies.
Beyond straightforward diversification, he employs other tactics that deliver the potential for both protection in down markets and participation in up markets.
Several strategies
“Examples of useful strategies includes collar option strategies, where we use put options to protect against losses but still leave room for some upside participation; low-volatility equity strategies — long-only equity strategies — that target more defensive, lower-beta, lower-volatility allocations; and finally, tactical allocation strategies,” Delany said. These strategies allow investors “to systematically reduce their equity allocation when the outlook is not favourable or increase it when the outlook improves.”
The most successful investors wouldn’t eliminate systematic risk from their portfolio, even if they could, he said.
“The only way to completely insulate a portfolio from systematic risk is to invest fully in cash, and this is a strategy that simply won’t generate the returns, over the long term, that most investors are looking for,” he said. “Taking a risk is a necessity when it comes to generating returns.”
The trick, he added, is to invest intelligently.
“Robust asset allocation, underpinned by both qualitative and quantitative analysis, goes a long way to deliver that smoother return profile that investors want.”
Delany said the key to the asset allocation process is considering the objective risk constraints of the client and tailoring the design of the portfolio accordingly.
Optimizing the portfolio
“The considerations here can include risk and return, but also liquidity constraints, income requirements, whether the portfolio is being built for pre- or post-retirement investors and so on,” Delany said. “Once these points have been established, we utilize an asset allocation framework that focuses on positioning portfolios to deliver over the long term.”
Emotions will still play a role when markets start to fluctuate, but there are several ways to tame them.
“The key step is education, ensuring that investors are invested in portfolios suited to their risk appetite and that they fully understand the loss potential of their investments,” he said. “Advisors have a key role to play here, sitting down with the client and outlining these considerations.”
He said getting comfortable with market volatility risk and understanding risk tolerances will help reduce “sub-optimal emotional responses” when losses occur.
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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
