The world seems to deliver breaking news every day, much of it unsettling, and it can disrupt the normal lives most of us want to live. Geopolitical crises like the ongoing conflict in Ukraine, the Israel/Hamas/Iran situation, and now tensions involving the U.S. are destabilizing. On top of that, political turmoil only adds to the noise. So, how does all of this impact the development and management of investment strategies?
At D&A, we are committed to globally diversified portfolio management designed to meet our clients' goals. Diversification—selecting investments with relatively low correlations to each other so that when some zig, others zag—is central to our approach. However, as many readers of this blog know, over short- to medium-term periods, diversification can sometimes be sub-optimal, especially when asset classes like U.S. large-cap equities have outperformed all other asset classes over the past decade.
For clients with a lower risk tolerance, D&A often leans into equities that exhibit less volatility compared to larger baskets of stocks. Exchange-traded funds (ETFs) targeting a carefully selected group of less risky equities are one such strategy. For example, while the S&P 500 (IVV) carries a 17% annual standard deviation of return, ETFs like the iShares Minimum Volatility ETF (USMV) have a 12% standard deviation, offering a smoother ride.
Bonds also play a defensive role in protecting against risky environments. However, D&A recognizes the interest rate risk embedded in longer-duration fixed-income assets. When interest rates rise, their impact on bond prices can devastate a portfolio if not properly managed. For instance, in 2022, core bonds (AGG) with long durations posted a -13% return, whereas shorter-duration bonds, such as the iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD), had a more manageable loss of just -4%.
Finally, although not directly managed by D&A, we emphasize the importance of an emergency fund to cover any unforeseen financial needs. It’s also highly valuable to "bucket" investments—keeping two to three years' worth of annual expenses in low-risk bond strategies. This helps avoid the need to sell equities if the market dips.
In a world that often feels unstable, D&A remains committed to building portfolios that can weather the storm. Our globally diversified approach, combined with strategic risk management and a focus on long-term goals, is designed to keep clients on track, no matter what challenges the world throws their way.