Joseph Brennan from the Vanguard Group gives his view on how investors should behave when volatility spikes
When Donald Trump was elected as president last November the U.S. stock markets reacted with glee. Trump’s policies on tax and deregulation were seen as being significant drivers for growth and the financial sector was quick to price-in those market boosting agendas.
U.S. equities have had a good run since last November but as doubt increases around Trump’s ability to enact his pro-growth policies, investors are watching on intently to see how the market responds if the possibility of deregulation and tax cuts fades further.
“When events occur in the markets that could spur volatility, investors should ask – ‘what does this mean for me?’” says Joseph Brennan, CFA, Principal, Equity Index Group at the Vanguard Group. “Valuations are stretched but I would not say we’re in bubble-territory. However, if volatility picks up enough, investors may want to rebalance to a mix that the markets had driven them away from. If markets hit a pocket of volatility, it’s a great time to consider rebalancing.”
With equity valuations high and yields on fixed income investments limited, two of the most popular – and successful – portfolio building blocks find themselves in a distinctly challenged environment. It’s an unwelcome combination for investors and many are placing pressure on their advisors to seek out alternative opportunities in order to achieve attractive returns. But making a change for change’s sake does not tend to end well. “It’s a mistake to try to time the market or look for an opportunity set that has a much higher risk,” Brennan says. “We never advocate a drastic portfolio shift – it’s generally not a winning game.”
As the active vs passive debate heats up, more asset managers are joining what some have called a race to the bottom on fees. For Brennan, however, the focus of the active-passive conversation is misguided and misses the point. “We have always advocated for low cost investing, so we think of it as a debate between high cost and low cost,” he says. “We try to offer low cost index funds as well as low cost active funds. We think they can coexist and work harmoniously in a portfolio, not due to their active and passive traits, but due to their common trait of low cost.”
With advisors’ compensation structures coming under close scrutiny here in Canada, having access to low-cost investment vehicles is growing in importance. More Canadian advisors are switching to fee-based models, a trend that took hold in the U.S. after the technology bubble burst in the early part of the last decade.
“Using low cost building blocks for client portfolios in a fee-for-service model has certainly taken hold in the U.S., but we’ve also seen the same trend trickling around the world in places like Australia and the UK,” Brennan says. “Advisors are switching their models and making efforts to provide asset allocation advice, low cost building blocks, tax advice and a holistic view of the financial picture going forward. It’s a trend that’s sweeping across the globe.”
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