Durable by Design: Reducing Volatility in Client Portfolios

VOLUME 17 | ISSUE 2

Volatility is a natural part of investing, but it doesn’t have to derail an investor’s long-term goals. In fact, managing volatility is one of the most effective ways to protect and grow wealth. The first few months of 2025 – which included a significant stock market drawdown, unexpected policy shifts, and geopolitical surprises – reinforced why a steady approach to portfolio management matters.

For investors, preserving capital can be just as important as growing it. One of our objectives when managing client portfolios is to mitigate what is called “sequence of return risk”. Sequence of return risk is the danger that poor market returns during the first few years that a client begins withdrawing funds can significantly reduce the longevity of their portfolio. Even if average returns are strong over time, the timing of losses can have a lasting negative impact on long-term wealth.

Sharp drops in market value can also trigger emotional decisions that may impact long-term returns. We focus on minimizing steep losses and keeping portfolios resilient during uncertain times. With complex, long-term goals like building income to last a lifetime, transferring wealth to future generations, or creating a legacy through philanthropic giving, it's essential that an investment strategy isn't derailed by temporary swings. Our approach to portfolio construction includes global diversification, liquidity planning, and exposure to uncorrelated assets, all designed to help the portfolio remain durable in a variety of market conditions.

Matching Strategy with Time Horizon

A key consideration in managing volatility is aligning the construction of a portfolio with an investor’s time horizon. The shorter a time frame, the more we emphasize capital preservation. For goals years or decades away, we allow for greater equity exposure and accept increased short-term fluctuations in pursuit of long-term growth.

A portfolio’s target volatility reflects both the investor’s objectives and when they will need access to the funds. For example, a retirement account with a 20-year horizon can afford more volatility than funds earmarked for near-term expenses.

Strategies for Reducing Volatility

We apply several time-tested strategies to manage risk and keep volatility in check:

• Diversification & Asset Allocation: We spread the assets within an investment portfolio across asset classes (stocks, bonds, real assets) and regions. This reduces reliance on any single asset’s performance. A carefully constructed asset allocation blends higher-risk assets like equities with stabilizers like bonds, creating a smoother return path.

• Rebalancing: As markets move, portfolios drift from their targets. We regularly monitor opportunities to rebalance, trimming outperformers and adding to undervalued areas. This disciplined approach manages risk and reinforces the long-term plan. Volatility can even create opportunities – for example, rebalancing discipline may lead us to buy quality investments at lower prices during a dip, which can better position the portfolio for the rebound.

• Hedging & Downside Protection: To add resilience, we may use “safe haven” assets such as short-term bonds and – in some cases – option strategies. The objective of these assets is to buffer against downside without unduly sacrificing upside in the overall portfolio.

• Emphasizing Quality & Flexibility: We focus on high-quality investments that are less sensitive to market stress. We also remain nimble, adjusting allocations when necessary to protect capital while staying aligned with your goals.

  
  

2025: Diversification in Action

The first few months of this year underscored the value of proactive risk management. U.S. markets opened strong, with major indices hitting record highs on optimism following the 2024 election and economic momentum. But by February, headlines around tariffs, inflation, and layoffs led to a steep market sell-off.

• Stocks: The reintroduction of tariffs and geopolitical tension led to bouts of volatility. Global diversification was critical: losses in U.S. markets were softened by strength in European defense stocks and other international exposures. Within U.S. equities, sector diversification meant that gains in energy and healthcare helped offset weakness elsewhere.

• Bonds: The Fed has held interest rates steady so far, but stubborn inflation and softening labor data have shifted expectations. As yields on new issues dropped, existing bond holdings gained value and provided essential ballast for portfolios during pullbacks in the stock market.

• Real Assets: With inflation climbing closer to 3%, inclusion of real assets and short-duration bonds in a portfolio helped cushion the impact.

Staying Focused on What Matters

It’s often said that “time in the market beats timing the market.” This adage holds true especially when volatility strikes. Market ups and downs are normal. Even in years with overall positive returns, it’s common to experience a few pullbacks along the way. The beginning of 2025 has reminded us that even as economies grow, uncertainty (whether from changing domestic policies or global events) can create short-term turbulence. The encouraging news is that with prudent strategies and professional portfolio management, market volatility becomes a manageable factor, not a reason for fear.

Our team is watching the markets closely and adjusting client portfolios as needed. While no one can predict exactly what markets will do next, we can say with confidence that our clients are invested in well-diversified, low cost, actively managed portfolios geared to handle volatility. Our entire approach to volatility management is about expecting the unexpected and ensuring our clients’ wealth stays resilient.

Through it all, we encourage our clients to keep a long-term perspective and remember that their portfolios are designed with downturns in mind. They are not a sign that the plan isn’t working, but rather a phenomenon we have already planned for.