How do I Invest in a Volatile Economy?

Investing during volatile economic times is not only tricky, but it can provide investors with heartburn as well. In a volatile economy, one day the data points and the equity market look bright and cheery. The next day, not so much and this scenario repeats until market forces decide a more docile environment is appropriate. Fortunately, there are ways for investors to survive and thrive during times of elevated volatility.

Don't Chase Growth, Cyclicals

Turbulent economic times have historically left cyclical sectors, or those industry groups heavily correlated to the business cycle, vulnerable to downside. Those sectors include consumer discretionary, energy and materials. Additionally, volatile economic climates are not conducive to growth stocks. A common trait of many growth stocks is that the market is expecting these companies to post exponentially higher rates of profit and revenue growth in the coming quarters. That feat becomes harder to accomplish in rapidly changing economic environments. When growth companies cannot provide Wall Street with the desired results, these stocks are often quickly repudiated.

Consider Bonds

Bonds are not just for older investors and bond investors need not limit themselves to U.S. Treasuries during volatile economies. Investors looking to generate income while skirting turbulent macro settings can consider a variety of bonds including municipals, high-grade corporates and emerging markets sovereigns. In the case of developing world sovereign debt, a good rule of thumb is to favor highly-rated issues, particularly in a volatile economic climate.

Favor Low Beta

Beta is a measure of a security or portfolio’s risk relative to the broader market. Knowing that, investors should dodge high beta stocks and sectors, such as discretionary and energy, during volatile economies. Even those investors that like to embrace risk should remember that, over time, low volatility value stocks frequently outperform their more volatile growth peers. Investors should take the low beta theme a step further by favoring lower volatility sectors known for good dividends. That list includes consumer staples, healthcare and utilities.

Diversify

Another way to ensure your portfolio thrives during a volatile climate is to remain diversified. Portfolio diversity does not just mean owning five stocks from five different sectors. It also means complementing stocks with bonds, real estate investments, hard assets and cash investments. The more diversified a portfolio is, the less vulnerable it is to the whims of the macroeconomic environment.