Ask an ally: Tips to build an all-weather portfolio to navigate volatility
Just like weather is seasonal, so is the stock market — and that can bring on any number of emotions as you navigate market changes. Consider this: Basing your investment strategy on the changing “seasons” of the market and inviting your emotions to dictate your decisions could result in costly mistakes.
We spoke with Portfolio Director Frank Newman and Senior Financial Advisor Deryck Gryne about why building an all-weather portfolio — a diverse portfolio designed to withstand all different types of market conditions — can be a valuable investment strategy.
Read more: Learn how a financial advisor can help you build a comprehensive financial plan.
What is an all-weather portfolio?
While markets and economies have patterns, they can also be unpredictable (much like the weather). An all-weather portfolio is a balanced investment approach designed with the intention of mitigating downside risks and pursuing consistent returns. While investing always incurs risk, diversifying your assets across various types of investments can help your portfolio be more durable through uncertain times.
Economic factors that impact your portfolio
The market and, in turn, your portfolio can either trend upwards or downwards depending on many factors. Here are three of them:
Inflation: High inflation can lead to lower returns on fixed-income investments. It can also negatively impact the value of other assets, such as stocks.
Gross domestic product (GDP): While strong economic growth, measured by GDP, can lead to increased earnings and higher stock prices, a slowdown or recession can negatively impact returns.
Unemployment rate: High unemployment can lead to lower consumer spending and reduced business investment, resulting in declining investment returns.
As economic conditions ebb and flow, investing in diverse assets can help mitigate drastic market shifts.
Key steps to building an all-weather portfolio
Whether you’re investing for retirement, a down payment, or your child’s education, consider these three strategies for your portfolio.
1. Understand your risk tolerance
Before you even begin investing, it’s important to assess your risk tolerance — your ability and willingness to tolerate losses while seeking returns. Your risk profile might be conservative (low risk, low reward), aggressive (high risk, high reward) or somewhere in between. You can work with a financial advisor to customize a portfolio that aligns with your long-term ability to handle risk.
2. Diversify across asset classes
To better mitigate risk, some investors might spread their investments both among and within different asset classes, such as:
Stocks
Bonds
Commodities
Marketable securities
Diversification also goes deeper within asset classes. For example, a stock allocation can be built across many different “sub-asset classes,” such as foreign stocks, U.S. large company stocks and U.S. small company stocks.
Different assets classes tend to perform differently throughout an economic cycle, so diversification has better potential when portions of a portfolio zig while others zag.
3. Focus on strategic asset allocation
How you choose to allocate your investments will depend on your risk tolerance, timeline and goals. While your asset allocation will need periodic tweaking (which your financial advisor can help you with), it’s important not to base your strategy on your emotions.
How to avoid common investor mistakes
To pursue your financial goals while managing risk, avoid making these errors:
Trying to time the market
“Timing the market” — buying low and selling high — is notoriously difficult. Frequently buying and selling investments based on short-term market trends can cause you to incur higher transaction costs and may lose you the opportunity of potential long-term gains. Plus, market timing is a double-edged sword. Not only must you correctly time when you sell an investment, but you also need to have the foresight on when to buy back in.
Herd mentality
Have investing FOMO? Or basing your investment strategy on what others are doing? Either can cause you to lose sight of the big picture. Just because "everyone is doing it” doesn’t mean that the shiny new object in the market aligns with your long-term financial goals. In fact, overhyped sectors can be highly volatile.
Have investing FOMO? Or basing your investment strategy on what others are doing? Either can cause you to lose sight of the big picture.
Reacting to short-term market moves
It can be easy to get caught up in the noise of today’s headlines and make decisions based on emotional reactions to market fluctuations. Remember: Long-term investing is a marathon, not a sprint. A well-defined investment strategy, as well as a financial advisor’s support, can help you stay the course.
How Ally Invest supports investors
With Ally Invest Personal Advice, you gain one-on-one access to a dedicated financial advisor to help keep you focused on the things that matter to you most. Their expertise in the market and access to Ally’s resources and tools help your portfolio focus on your long-term goals while making strategic adjustments along the way ... no matter the season.
