Here’s How to Shape Your Portfolio When Volatility Is Rising By Investing.com

Global stocks have seen an increase in volatility in recent weeks, forcing investors to rethink their strategies and prepare for sharper market moves.

According to the latest research from Piper Sandler, a key consideration during times of increased market turbulence is how best to structure your investments to balance return and risk.

In recent weeks there have been notable fluctuations, with daily swings of over 1%, some days reaching 2% or even 3%. This increased volatility coincides with changing investor sentiment as optimism about easing inflation battles concerns about weakening employment.

Given this environment, many investors consider barbell strategies—a popular method during volatile times when portfolios are split between high-risk and low-risk assets. However, analysts say this approach may not be the most effective.

“Bar strategies actually reduce returns and increase volatility compared to simply holding more balanced, middle-of-the-road stocks,” the report said. The logic behind this is simple: by avoiding the extremes of high and low beta stocks, investors can achieve a more stable and less volatile portfolio.

The report highlights the potential pitfalls of barbell strategies. While these approaches may seem appealing during volatile times, they often result in higher volatility and lower returns.

“Being balanced has better returns than a barbell,” the analysts note, and it also has lower volatility.

What’s more, the team emphasizes that it’s not just about beta, it’s also about size and style.

They note that a balanced approach outperforms barbell strategies in these areas as well. For example, a portfolio balanced across different market sizes or styles tends to perform better and with less volatility than one that tries to balance by focusing on the extremes.

Analysts also reflected on the current state of the market, which is still digesting the lingering effects of the Federal Reserve’s tightening cycle.

As the Fed keeps rates higher for longer, this is usually the part of the cycle where volatility peaks. In this context, the team advises caution against embracing too much cyclicality or betting on highly volatile themes. Instead, they recommend focusing on more balanced, higher-quality value drivers such as earnings yield and free cash flow yield.

“These factors underperform after market downturns, but also hold up well during market peaks, with much less volatility throughout the cycle,” the analysts explained.