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De-Risking in a Bear Market

De-Risking in a Bear Market

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Christine Benz: Hi, I'm Christine Benz from Morningstar. Amid volatile markets, some nervous investors might be wondering if they should be downplaying risky assets as a percentage of their portfolios. Joining me to share some thoughts on this topic is Alex Bryan. He's Morningstar's director of passive strategies research for North America. Alex, thank you so much for being here.

Alex Bryan: Thank you for having me.

Benz: Alex, let's talk about this idea of de-risking a portfolio. The clearest and most obvious way to do that would be to change up your asset allocation, potentially trim back your equity assets, but what about doing that this far along into a bear market? Is that a wise strategy?

Bryan: I think it really depends on the investor. The market is already probably giving you a more conservative asset allocation than most people had a month or two ago because stocks have sold off a lot more than bonds. So I think it's important to take a look at your current asset allocation, make sure that it's still in line with your long-term comfort with risk. For a lot of investors, it might be appropriate to rebalance into stocks if they're below their target asset allocation. But if you're someone who needs the money in your portfolio in the near term, let's say in the next year or two, and the last month has exposed more risk in your portfolio than you're comfortable with or that you thought you had, it might be appropriate to shift to a more conservative asset allocation because the most important thing is having a level of risk in your portfolio that you can stick with, something that you can sleep with at night. So I think it really does depend on the investor.

Benz: How about for investors who would like to maintain their same asset-allocation plans but employ some lower risk investments within those asset-class exposures? Let's start with equities, and through this crisis we've seen funds like Vanguard Dividend Appreciation perform really well. What about that strategy has been working in this environment?

Bryan: This strategy, just to be clear: It's a fully invested stock strategy, so it still has gone down quite a bit. For a lot of investors, losing less than the market still feels pretty bad, so it's important to keep that in mind. But this is a strategy that, not just during this environment but during market downturns more broadly, it tends to hold up better than the market during sell-offs. It basically targets stocks that have raised their dividends in each of the past 10 years and then weights them based on market capitalization. So if you think about the types of stocks that can consistently raise their dividends for 10 years straight, these are companies that have durable competitive advantages or, at Morningstar as we call them, wide economic moats. Firms that are able to weather market downturns better than most, so it's really more of a quality-oriented strategy than it is a dividend strategy. The dividend yield here is not that much higher than the broad market, but the real advantage comes with better downside protection from this fund.

Benz: Let's talk about low-volatility strategies. I know that you and the team have been closely monitoring that universe of low-volatility exchange-traded funds. How have they done through this, and are there any funds in that space that you recommend?

Bryan: Actually the last month was kind of interesting. Typically, low-volatility strategies hold up better than the market during downturns, but if you look at the past month through March 24 they are down about as much as the broad market, which was a little surprising. But I think that raises a more important point to keep in mind that although these types of strategies tend to hold up better than the market during downturns, that doesn't mean that every day that the market is down they're going to be down less than the markets. That's important to keep in mind. But I do think low-volatility strategies are worth keeping in mind if you're looking for a more conservative way to get exposure to stocks. One of the options that I really like is iShares Edge MSCI USA Minimum Volatility ETF, the ticker is USMV. It's a really interesting strategy.

Benz: Now how about on the bond side? It seems that the total bond market index products have actually been holding their own through this, right?

Bryan: That's right. Vanguard Total Bond Market ETF has actually held up fairly well because it has a pretty conservative portfolio. About three fourths of its assets are in AAA rated securities, so it has a lot of Treasuries and agency mortgage-backed securities. So that I think is a really good option to basically act as a counterweight to stocks if you're looking for a way to diversify your stock risk. That being said, this fund and some other core fixed-income ETFs have started to trade at a discount to their net asset value, which is a little unusual but that's something worth noting. Now, if you are concerned about that, you can get exposure to this fund through a mutual fund share class. Vanguard offers the fund through both an ETF as well as a mutual fund share class. So if that's a concern, that is an option worth keeping in mind.

Benz: Alex, it's always great to get your perspective. Thank you so much for being here.

Bryan: Thank you for having me.

Benz: Thanks for watching. I'm Christine Benz from

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About the Authors

Alex Bryan

Director of Product Management, Equity Indexes
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Alex Bryan, CFA, is director of product management for equity indexes at Morningstar.

Before assuming his current role in 2016, Bryan spent four years as a manager analyst covering equity strategies. Previously, he was a project manager and senior data analyst in Morningstar's data department. He joined Morningstar in 2008 as an inside sales consultant for Morningstar Office.

Bryan holds a bachelor's degree in economics and finance from Washington University in St. Louis, where he graduated magna cum laude, and a master's degree in business administration, with high honors, from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation. In 2016, Bryan was named a Rising Star at the 23rd Annual Mutual Fund Industry Awards.

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

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