The recent shock to global stock markets may cause concern for investors, but it may also provide opportunities for active managers. Here we provide five ideas for positioning portfolios during periods of market volatility.
1. Execute your long-term plan.
Historically, corrections (i.e., declines) of 10% have occurred about every two years in the S&P 500® Index. The last 10% correction was in 2011, so this week’s drop, though dramatic, wasn’t entirely unexpected to market experts. With the current market decline, consider rebalancing back to the original target weights in your investment plan and putting excess cash to work.
2. Reassess your risk tolerance.
We don’t believe this is the time to reduce allocations to equities. But for those who are uncomfortable with market risk, consider less aggressive equity funds or investing in market neutral equity funds.
3. Evaluate your core bond holdings
Do your core bond holdings act like stocks? Watch out for multi-sector strategies disguised as core bond funds. Multi-sector bond funds have higher correlations with stocks and may become even more correlated during market uncertainty. True core bond holdings are more correlated to the Barclays U.S. Aggregate Bond Index.
4. Evaluate your international holdings
Passively managed international funds can present hidden risks to your portfolio. Active funds that add value through security selection have the potential to manage risk and find opportunities in volatile markets.
5. Diversify with asset allocation portfolios
Consider a well-diversified asset allocation or target-date fund that puts decisions about rebalancing and volatility into the hands of seasoned portfolios managers.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost.
Past performance is no guarantee of future results.
Diversification does not assure a profit or protect against a loss of principal.
Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
The opinions expressed are those of our investment professionals, and are no guarantee of the future performance of any American Century Investments® portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.