The return of volatility

You can still thrive in bumpy times - as long as you stick to a diversified plan.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Janice Revell, Carolyn Bigda and Donna Rosato, Money Magazine


(Money Magazine) -- Old: Investing in the '80s and '90s sure was simple. The economy and stock market grew rapidly, and the occasional recession or bear market didn't last. True, the 2000-02 bear hung around, but it was followed by history's second-longest uninterrupted rally. And while triple-digit up or down days in the Dow weren't uncommon, the long-term trajectory of stocks became predictable. So much so that this era had its own name: the Great Moderation.

New: There's nothing moderate about the economy that's likely to emerge from this recession. For starters, many of the economic mega-trends that smoothed our ride are behind us: for instance, the quarter-century decline of interest rates that brought yields on 10-year bonds down from 15% to 3%, and the fall in inflation from 13% to nearly nil.

As rates and inflation inevitably rise, they're likely to stall the market - or jam it into reverse - more frequently and for longer periods than we've grown accustomed to. The current bear is already 19 months old, about the average length of the typical downturn since 1929. It - and not the three-month bears you saw in the '80s and '90s - will almost certainly be closer to the new norm.

You also live in a world that's got more, and more voluble, powerbrokers. In 1995, countries like China and India accounted for less than 17% of the world's GDP. Now fast-growing but often politically volatile emerging markets have overtaken the U.S. They collectively represent 28% of global GDP and 65% of growth.

It became popular a few years back to argue (wrongly, it turned out) that emerging markets were "decoupled" from the U.S., meaning a recession here wouldn't hurt there. It did. Going forward, emerging markets will have an increasingly large impact on the health of the U.S. economy - and on your portfolio. No wonder Pimco managing director William Gross warns: "Investing is no longer child's play."

How you can profit

Though the prospect of investing in an increasingly volatile world might push you toward trying to play it safe at home, the reality is that you need more diversification - not less. Yet retirement investors keep less than 13% of their equity stake overseas and 2% in emerging markets, about half what planners suggest.

You can build those levels up through a global portfolio that invests in the developed and emerging world, such as Vanguard FTSE All-World ex-U.S (VEU)., a Money 70 ETF. An alternative is an energy fund, since many oil companies do a good deal of business overseas.

Diversification goes beyond stocks. You'll also want exposure to real estate and traditional and inflation-protected bonds. And since most of your fixed income is in the U.S., spread that bet through a fund like T. Rowe Price International Bond (RPIBX), which invests in foreign bonds from developed nations.

Finally, don't forget cash. If stocks are headed for rough seas, cash offers ballast, lessening the chance you'll sell in a panic. And overreacting to change is the last thing you'll want to do in these new, uncertain times.

The downsizing of the U.S. consumer

The demise of the 'ownership society'

The rise of freelance nation

The era of new regulation

Additional reporting by Emma Haak. To top of page

Send feedback to Money Magazine
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.