This article was written by David Keelaghan, News Editor and originally appeared in Wealth Professional on February 21, 2017.
This article was written by David Keelaghan, News Editor and originally appeared in Wealth Professional on February 21, 2017.
Now that the digital age is upon us, we’ve become experts at comparing various products and services. Conducting due diligence has never been easier. At the click of a button we can compare product features, sort by top sellers, and even read reviews and recommendations from other customers.
The conventional method to reduce risk in a balanced portfolio involves decreasing the portfolio’s riskier asset class, which for most investors is likely the equity allocation. For example, shifting from 55% equities and 45% bonds to 30% equities and 70% bonds. The following graphic illustrates this as the move to the “lower risk benchmark portfolio”.
Global bond yields have been on a multi-decade decline; therefore, it should be no surprise that today’s yields are at or close to historically low levels. Chart #1 shows the extent of this decline for the 10 year Government of Canada (“GoC”) and U.S. Treasury (“UST”) bonds. From December 1990 to June 2016, the GoC yield started the period at 10.3%, averaged 5.1%, and closed at a mere 1.06%. Over the same period, the UST yield started at 8.4%, averaged 4.8%, and closed at a mere 1.5%.
Semi-deviation (also called downside deviation) is a variation of the more commonly used metric, standard deviation. Both measures track the historic variability of returns around an investment’s average return, however, semi-deviation only considers those returns that fall below the investment’s average. A lower semi-deviation indicates an investment with lower downside risk.
My last blog discussed the importance of downside protection, specifically looking at the asymmetry of gains and losses, and poor historical investor behaviour. This blog will investigate some strategies investors can implement to potentially protect their portfolio from significant losses in down markets, while still allowing them to participate in rising markets.
Markets go up and markets go down. That’s the nature of investing in stocks and bonds, whether directly or indirectly through investment funds. Investors generally like upside volatility (when markets go up), but are much less tolerable towards downside volatility (when markets go down). Implementing downside protection strategies regardless of current market conditions can help reduce volatility when markets do go down, thereby helping to preserve and build wealth over the long-term.
The European Central Bank (ECB) announced a number of new policy initiatives on March 10, including:
Global stock market volatility accelerated in recent days on renewed global economic weakness concerns. Continued economic and stock market weakness in China has received much of the blame for the recent volatility. Last week’s devaluation of the Chinese renminbi against the U.S. dollar was an attempt by the Chinese government to boost exports, but may also signal an economy that is weaker than official reports indicate.
The old proverb “may you live in interesting times” certainly applies to the bond market these days. It has been an extremely volatile year so far, with Government of Canada 10yr bond yields dropping from 1.80% at the start of the year to a low of 1.24% in February. But since then they’ve bounced right back up to around where they started!
