Brendan Greenwood CIM, B.Comm | March 20, 2020
The stock market has fallen off a ledge in recent days. Fear has been fueled by the spread of COVID-19 and the economic impact the virus will have on the global economy.
The VIX which is often referred to as the fear gauge has spiked to levels not seen since the 2008 financial crisis. The VIX measures expected future stock market volatility. Most of the time the VIX is inversely correlated with the stock market, If the VIX rises, the stock market falls. The VIX’s gauge on volatility matters, because as volatility increases, downside risk increases.
Market uncertainty is inevitable and contributes to volatility, but there are ways we can minimize your investment portfolio volatility and still meet your investment goals.
There are the four pillars I consider important in constructing a portfolio that can weather market uncertainty and improve investment outcomes.
1) Liquidity
Include bonds, cash and alternative assets classes such as gold that typically don’t move with the stock market and often move in the opposite direction. These assets can provide significant protection against loss in a market downturn. They also provide future opportunity to buy into the stock market at discounted prices when market volatility subsides.
2) Stability
Owning companies that have a long track-record of steady revenue growth can provide a solid source of dividend income and help minimize investment volatility. These companies are often found in sectors that are less sensitive to economic cycles, such as consumer staples, utilities, healthcare and telecom.
3) Global
When we look at industry in Canada, over 50% of the stock market value is made up of energy, mining and financial companies. Investing globally provides exposure to a broader more diversified mix of investment opportunities. This helps avoid over concentration and reduce risk in uncertain economic times. You only have to look at the size of the current stock market correction of the TSX to see the impact of over concentration.
4) Alpha
Alpha, refers to excess return above the broader market. Investing in sectors of the economy that tend to have businesses that grow at faster rates, will provide potential for outperformance and further diversify your asset mix.
More risk does not necessarily mean higher expected returns. To weather this and future storms ensure your investment portfolio is built upon these four solid pillars. It will help ensure you meet your long-term investment goals and still sleep at night.
Brendan Greenwood is an Investment Advisor with Worldsource Securities focused on personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionally incorporated individuals, business owners, tech professionals and retirees.
For other articles authored by Brendan Greenwood on issues impacting business owners and investors see https://www.greenwoodwealth.co/blog.
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