Global stock markets have seen increased volatility in recent weeks, forcing investors to rethink their strategies and prepare for sharper market moves.
According to the latest Piper Sandler research, the key consideration during periods of increased market turmoil is how to optimally structure your investments to balance returns and risk.
Recent weeks have been marked by significant volatility, with daily swings exceeding 1%, and on some days reaching 2% or even 3%. This increased volatility coincides with changing investor sentiment, as optimism about falling inflation clashes with concerns about weak employment.
In this environment, many investors are considering barbell strategies – a popular method during volatile times where portfolios are split between high-risk and low-risk assets. However, analysts argue that this approach may not be the most effective.
“Barbell strategies actually dampen returns and increase volatility compared to owning more balanced and moderate stocks,” the report says. The logic behind this is clear: 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 risks of barbell strategies. While these approaches may seem attractive during volatile periods, they often result in higher volatility and lower returns.
Analysts point out that “balance yields better returns than iron rod,” and has lower volatility.
Furthermore, the team points out that it’s not just about the beta, but also about the size and style.
They point out that the balanced approach outperforms barbell strategies in these areas as well. For example, a portfolio that is balanced across different market sizes or styles tends to perform better and with less volatility than one that tries to balance by focusing on extremes.
Analysts also look at the current state of the market, which is still digesting the lagging effects of the Fed’s tightening cycle.
With the Fed keeping interest rates higher for longer, this is typically the part of the cycle when 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 factors, such as earnings yield and free cash flow yield.
“These factors underperform after market declines, but they also hold up well at market peaks, with much lower volatility throughout the cycle,” the analysts explained.