4 Strategies for Navigating Volatile Equities Markets

Christopher J. Wolfe, Chief Investment Officer, First Republic Investment Management
July 24, 2023

  • Inflation and higher interest rates for longer may cause continued volatility in the equities markets
  • Fortunately, investors can implement multiple strategies to help diversify their portfolios to weather the storm of a volatile market
  • Consider partnering with your advisor to determine which strategy aligns best with your financial goals and risk profile 

If you had to pick one word to define the recent equities market, it might be “volatile.” The U.S. and global economies have faced multiple challenges, from increased inflation to rapidly rising interest rates. While these economic headwinds may continue to hinder performance of equities — and naturally, concern investors — they also offer the opportunity to shift to a more diversified portfolio strategy. 

As we move further into 2023, here are a few strategies for investors to consider when managing the equity risk in their portfolios:

Prepare for a challenging year

According to First Republic’s 2023 Market Outlook, there are several factors that may contribute to a challenging year ahead. Some potential issues that warrant investor attention include:

  • Inflation and the Federal Reserve’s (the Fed) quantitative tightening program. We expect the Fed to continue its efforts to battle rising prices with higher interest rates for longer.
  • Slowing economic growth as consumers pull back on their spending.

Consumers are understandably price sensitive and their willingness to spend more for the same products may be waning.

  • Declining corporate earnings growth.                                                                         We’re already seeing some corporate earnings growth slow, which will likely remain the case over the next several months.

The combination of the above factors could create choppy waters for equity investors. As a result, equity investors should expect more bifurcated returns as they navigate the year ahead. 

Four ways to diversify your portfolio

Volatility can help investors reassess their risk tolerance and adjust their portfolio allocations accordingly. Doing so is important for investors who are more focused on not losing money versus growing their portfolio (i.e., pre-retirees or retirees), as well as investors who may be seeking higher returns in other areas.

Here are a few strategies for diversifying your portfolio:

1.       Implement flexible strategies

Moving assets into short-term strategies such as short-duration portfolios, floating rate bond funds, Treasuries, or cash and cash equivalents may reduce your equity exposure and help mitigate volatility in concentrated portfolios.  These options can provide flexibility, allowing you to reinvest into other asset classes or have increased liquidity if you need it.

2. Move from growth to dividend-paying stocks

Shifting toward more dividend exposure can be a smart move, as dividend-paying stocks are historically less volatile than growth stocks and provide an additional return source. However, even though these stocks tend to perform well during turbulent markets, investors should note that there's no guarantee they'll make it through this next cycle unaffected.

3. Explore alternative investments

According to our outlook, past downturns have created opportunities for private equity and venture capital investors as private company valuations dip. That said, alternative asset classes are often higher risk than traditional equities. It's a tradeoff investors make for the possibility of an outsized return and passive income.

4. Take advantage of option strategies

Options trading are designed to provide some protection from losses or take advantage of specific aspects of a down market. However, implementing options means higher risks and requires a high level of investment expertise, and investors should outline expectations with their First Republic advisor. Also, you’ll likely pay a premium for options strategies, so consider the associated fees as you evaluate their cost-benefit.

Revisit your investment strategy with a diversified approach

It's understandable to have concerns during a market uncertainty — investors don’t want to lose money or time due to these cycles. The benefits of a diversified portfolio could help you address your near-term needs, while prioritizing your long-term goals. It all starts with having a plan and implementing ongoing strategies to get you to those goals.

Contact your First Republic advisor to learn more about these investment strategies and how they may help realign your portfolio and risk profile to adapt to the challenges of the upcoming year.

This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. This document may not be reproduced or circulated without our written authority.

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