Downs and Ups: Managing Equity Volatility Goes Both Ways

Defensive equity strategies that limit downside losses but lag too much in up-markets may be missing the mark. Is there another way to reduce volatility?

Market volatility can shake the resolve of even the most patient investors. But creating a portfolio that consistently delivers a smoother pattern of returns is challenging and requires an active strategy that focuses on both down and up markets.

That matters now more than ever.

After two years of fighting inflation, the world’s central banks have pivoted by telegraphing monetary easing over the coming year. And while the global economy appears on track for a soft landing, investors are staring down several risks in 2024—including stubborn pockets of inflation, geopolitical instability and market concentration.

Any of these risks could ratchet up market volatility, bolstering the case for defensive equity strategies. But while most low-volatility strategies can provide some measure of risk mitigation in down markets, many fall short during market rallies—mainly because they’re designed solely for defense.