Reading list: Sally Savoia’s approach on navigating high Volatility
The recent market turbulence has highlighted several crucial lessons about asset correlations during periods of high volatility. Typically, diversification is a cornerstone of risk management, but these past days have underscored its limitations when correlations spike unexpectedly. Even assets traditionally seen as uncorrelated, such as stocks and bonds, can move in tandem during market panics, reducing the effectiveness of diversification strategies.

Sally Savoia approach to managing volatility and asset correlations in dynamic markets can be summarised as below:

1. Diversified Portfolio with a Tactical Approach

While diversification is foundational, it’s important to be tactical about it. In times of high volatility:

- **Increase Allocation to Safe Havens**: Consider boosting holdings in assets like gold, US Treasuries, or cash equivalents. These assets tend to perform well during market stress.

- **Sector Rotation**: Rotate investments into sectors that are less correlated with the broader market downturn. For instance, consumer staples, utilities, and healthcare often hold up better during economic slowdowns.

2. Utilise Hedging Strategies

Hedging can protect against downside risks and provide opportunities for gains during volatile periods.

- **Options and Futures**: Use put options to hedge against potential declines in your portfolio. This strategy can limit losses and provide a degree of downside protection.

- **Inverse ETFs**: Invest in inverse ETFs, which are designed to rise when the underlying index falls. These can be effective short-term tools to profit from market declines.

3. Focus on High-Quality Assets

In turbulent times, high-quality assets often fare better.

- **Blue-Chip Stocks**: Companies with strong balance sheets, consistent earnings, and solid dividends tend to be more resilient.

- **Investment-Grade Bonds**: Higher-quality bonds are less likely to default and can provide a stable income stream.

4. Exploit Volatility with Tactical Trading

Volatility can create opportunities for short-term traders.

- **Volatility Trading**: Instruments like the VIX ETFs allow you to profit directly from increases in market volatility.

- **Technical Analysis**: Use technical analysis to identify short-term trading opportunities. Patterns, support/resistance levels, and momentum indicators can guide entry and exit points.

5. Invest in Defensive Stocks and Funds

Defensive investments are less sensitive to economic cycles.

- **Dividend-Paying Stocks**: Companies with a history of paying and growing dividends can provide income and potentially outperform in downturns.

- **Low-Volatility Funds**: ETFs and mutual funds focusing on low-volatility stocks aim to reduce risk and provide steadier returns.

6. Global Diversification

Spreading investments across various geographies can reduce the impact of localized market downturns.

- **Emerging Markets**: Consider selective exposure to emerging markets, which may not be as correlated with developed markets.

- **Currency Diversification**: Holding assets in different currencies can also mitigate risks associated with currency fluctuations.

7. Maintain Liquidity

Having cash on hand allows you to take advantage of buying opportunities that arise during market sell-offs.

- **Cash Reserves**: Maintain a portion of your portfolio in cash or cash equivalents to enable quick, opportunistic buys during downturns.

8. Stay Informed and Agile

Continuous monitoring and quick adaptability are key.

- **Regular Reviews**: Conduct regular portfolio reviews to ensure alignment with market conditions and adjust your strategy as needed.

- **Stay Updated**: Keep abreast of economic indicators, central bank policies, and market news to anticipate potential market movements.

In a nutshell:

By implementing a combination of these strategies, can help to navigate high volatility with a more resilient portfolio and potentially profit from market turmoil.

Each approach requires careful consideration of everyone’s risk tolerance, investment horizon, and market conditions, but together they provide a comprehensive toolkit for managing and capitalising on volatile markets.