This is how to shape your portfolio when volatility is on the up

Global equities witnessed a surge in volatility in recent weeks, forcing investors to rethink their strategies and prepare for more sharp market movements.

According to Piper Sandler's latest research, a key consideration during periods of increased market turbulence is how best to structure your investments to balance returns and risk.

Recent weeks have seen notable fluctuations, with the S&P 500 experiencing daily swings of over 1%, with some days reaching 2% or even 3%. This heightened volatility coincides with changing investor sentiment, as optimism around softening inflation battles with concerns over weakening employment.

Given this environment, many investors are considering barbell strategies—a popular method during volatile times where portfolios are split between high-risk and low-risk assets. However, analysts argue that this approach might not be the most effective.

"Barbell strategies actually dampen returns and increase volatility compared to simply owning more balanced, middle-of-the-road stocks," the report states. The logic behind this is straightforward: by avoiding the extremes of high and low beta stocks, investors can achieve a more stable and less volatile portfolio.

The report highlights the potential pitfalls of barbell strategies. While these approaches may seem appealing during volatile periods, they often result in higher volatility and lower returns.

"Being balanced has better returns than a barbell,” analysts note, and it also has lower volatility.

Moreover, the team points out that this is not just about beta, but also about size and style.

They note that a balanced approach outperforms barbell strategies in these areas as well. For example, a portfolio balanced between different market sizes or styles tends to perform better and with less volatility than one that attempts to balance by focusing on extremes.

Analysts also reflected on the current state of the market, which is still digesting the lagged effects of the Federal Reserve’s tightening cycle.

With the Fed keeping rates higher for longer, this is typically the part of the cycle where volatility peaks. In this context, the team advises caution against embracing too much cyclicality or betting on highly volatile themes. Instead, they recommend focusing on more balanced and higher-quality value factors, such as earnings yield and free cash flow yield.

“These factors have more muted outperformance after market troughs, but they also hold up well at market peaks, with much less volatility throughout the cycle,” analysts explained.

Source: Investing.com