On the other hand, market volatility following his executive order to ban immigration from seven predominantly Muslim nations until new vetting procedures are implemented illustrates how investors fear that he may create political tension with other countries that could shock the global economy. In addition, reports of Trump having tense conversations with leaders of Australia and Mexico, and China’s concerns over Trump’s conversations with Taiwan’s president further underscore those concerns. Trump’s potential trade protectionist policies are also lingering in the back of some investors’ minds.
At the same time, some investors may be anxious that the current equity rally is close to turning eight years old. When considering those factors, it’s likely that volatility will persist as investor sentiment oscillates between optimism and pessimism over Trump’s policies and other market factors.
For advisors, such market conditions call for increased handholding with clients and prudent portfolio risk management. In addition to ensuring that their clients’ portfolios are diversified and have appropriate levels of risk, advisors may also evaluate if low volatility exchange traded funds may be appropriate, although some reviews of the products have been mixed.
Last year, for example, an article in The Wall Street Journal pointed out that some low-volatility funds may not be immune to experiencing substantial declines. The top 25 holdings within the iShares Edge MSCI Min Vol USA Fund, for example, fell an average of 17% in 2008, which while being substantially less than the 37% decline of the S&P 500, was still substantial.
Like with any investment, advisors should also assess the valuations of individual holdings. Like any other asset class, when the defensive types of stocks held by low volatility funds are popular, their valuations can get lofty.
A new twist on investing in debt may also have potential for dampening volatility, maintains Stephen McBride, who is an editor and researcher at Garret/Galland. In a Forbes article, McBridge points out that marketplace lending, also known as peer-to-peer lending, has generated an average 7% return on 36 month loans while having low correlations to other asset classes.
The platforms are operated by firms such as Lending Club and Prosper. Advisors, however, should keep in mind that the platforms are relatively new, so they don’t have the long-term track records of traditional asset classes.
Even though low volatility funds and new investment opportunities, such as marketplace lending, may potentially reduce risk, it’s likely that they won’t be a substitute for traditional portfolio allocation practices that include combining diversified assets.
For advisors, convincing clients to include an allocation of bonds in order to diversify their portfolios may be a hard sell when considering that bonds have declined following the election in response to fears that Trump’s proposals for deficit spending may support inflation. Yet, advisors should be prepared to show their clients how different asset allocations may perform in different market conditions.
At the same time, advisors should be prepared to encourage their clients to ride out market volatility.