A. For long-term investors, the most damaging potential threat of a major equity market shock is not the volatility itself, but the temptation to abandon the long term strategy out of fear and sell assets at the worst possible time.While volatility gives rise to anxiety, it also creates opportunity. Below are 3 strategies that long-term investors can use to prepare their portfolios for volatility, depending on the investor’s conviction about near-term conditions and longer-term opportunities.
Strategy 1. Invest in Assets with Low Correlations with Equity Markets
Such assets include long term U.S. Treasuries, Gold Bullion, and Utility stocks. Combined, these assets had an average correlation of zero over the past 8 years.
Such strategy is probably more acceptable for most investors than the hedging strategy, because a hedging strategy is designed to protect portfolios rather than keeping pace with the market. While it's certainly better to have an insurance policy in place before your house is on fire, investors may find their behavioral biases taking over if hedges are constantly in the red as markets continue to gain.
We will introduce strategy 2 in next blogpost.