2. Playing Defense. If anyone owned a crystal ball, he/she could tell you precisely how to make mad money. Without a crystal ball, one is left to interpret incoming information and respond accordingly. My interpretation since the first few weeks of 2014 is that increased S&P 500 VIX volatility, declining bond yields, equity fund outflows and rate-sensitive asset outperformance collectively flash a yellow warning sign. Under those circumstances, I am not looking to sell every asset, but instead, reduce the overall risks associated with participation.
A defensive mindset does not mean your portfolio is going to gain ground if the broader equity markets hit a full-blown 10% correction. It certainly does not imply that you will profit if a bear tramples across the field. Playing defense means losing less when market gyrations are making it difficult for an investor to sleep at night. You won’t gain as much if investors fall back in love with the riskiest stocks; then again, you will lose less if stocks continue drifting lower.
I have shifted toward a more defensive posture by allocating more to short-term high yield ETFs, Muni ETFs, Healthcare (XLV), Utilities (XLU) as well as Minimum Volatility ETFs such as iShares MSCI USA Minimum Volatility (USMV). For more specifics, explore one or more of the features below:
(A) In January 14th’s “3 Trends That Might Shock The Risk-On Mindset,” I discussed the flattening of the yield curve and using Bond ETFs that benefit from longer-dated maturities.
(B) In January 16th’s, “Against The Herd: Lower Rates Rather Than Higher Rates,” I explained why economic uncertainty during the tapering process would actually encourage investors to seek out safer havens, including Muni ETFs.
(C) In January 27th’s, “Ride The Risk-Off Trade Alongside Lower Interest Rates,” I talked about a shift towards traditionally safer equity ETFs like SPDR Select Health Care, SPDR Select Utilities as well as iShares Telecom (IYZ).