27 March 2024

At the Money: Using Volatility to Rebalance Portfolios

1Frameworks

6Insights

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Portfolio-Triggered Rebalancing

Use allocation drift and volatility to add low and trim high.

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Hot Take· 1

Hot Take05:05

Why the Fed May Take the Escalator Down on Rates

Sonders says markets had priced an excessively aggressive rate-cut path that incoming inflation and employment data did not support. Unlike the rapid hiking cycle, she expects policymakers to approach reductions gradually.

Rate expectations must adapt to incoming economic data.
The market had anticipated an early start and as many as six cuts.
Hotter inflation and employment reports weakened that scenario.
The easing cycle may proceed more slowly than the hiking cycle.

“The data just did not support”
Liz Ann Sonders · 06:01

“I think their inclination is to take the escalator down.”
Liz Ann Sonders · 06:13

#federal reserve#interest rates#inflation#monetary policy

Explainer· 4

Explainer00:49

Your Emotional Risk Tolerance May Overrule Your Financial Plan

Sonders argues that portfolio allocation cannot be prescribed without understanding the individual investor. Time horizon and financial capacity matter, but the plan must also reflect how the investor will actually behave during a sharp decline.

Identical market forecasts can justify different portfolios for different investors.
Time horizon does not automatically determine risk tolerance.
Financial risk capacity and emotional risk tolerance can diverge.
A viable plan must survive the investor's real reaction to losses.

“So it depends on the individual investors.”
Liz Ann Sonders · 02:02

“You can't start this process of investing by winging it.”
Liz Ann Sonders · 02:21

#risk tolerance#financial planning#asset allocation#investor behavior

Explainer06:16

When Geopolitics Matters to a Long-Term Portfolio

Geopolitical events and elections often produce short-lived volatility rather than durable changes to long-term investment outcomes. Sonders says their effects become more consequential when a prolonged event persistently moves through commodity channels such as oil or food.

Geopolitical shocks commonly affect markets in the short term.
Election outcomes can cause volatility and sector-level moves.
Protracted disruptions can matter through oil, food, and other commodities.
Strategic allocation should not be abandoned because of temporary noise.

“things like geopolitics tend to have a short term impact.”
Liz Ann Sonders · 06:41

“They can be a volatility driver,”
Liz Ann Sonders · 06:45

#geopolitics#elections#volatility#commodities

Explainer07:22

The Emotional Cycle Behind Bull Markets

Sonders invokes John Templeton's description of bull markets progressing through despair, skepticism, optimism, and euphoria. The model highlights how sentiment can define an entire cycle even though daily financial coverage concentrates on earnings, valuation, and economic releases.

Market cycles move through recognizable emotional states.
Despair and skepticism characterize earlier phases.
Optimism and euphoria emerge later in the cycle.
Daily data can obscure the market's underlying psychological dynamics.

“The market is almost always extremely sentiment driven.”
Liz Ann Sonders · 07:22

“It's all about psychology.”
Liz Ann Sonders · 07:49

#market psychology#sentiment#bull markets#john templeton

Explainer09:55

Why the Old Stock-Bond Relationship May Be Changing

Sonders contrasts the disinflationary Great Moderation with the more inflation-sensitive period from the mid-1960s to the mid-1990s. Rising yields can support equities when driven by stronger real growth, but they can hurt them when driven by renewed inflation, changing the diversification behavior investors expect from stocks and bonds.

The stock-bond relationship depends on the inflation regime.
During the Great Moderation, higher yields often reflected improving growth.
Earlier decades saw yields rise more frequently because inflation returned.
A new regime may favor more active choices in equities and fixed income.
Bondholders who hold to maturity still receive yield and principal, subject to issuer risk.

“we do think that we are in the midst of a secular shift.”
Liz Ann Sonders · 10:01

“but it's a different backdrop than what a lot of people are used to.”
Liz Ann Sonders · 11:30

#stocks and bonds#inflation#fixed income#great moderation#correlation

Takeaway· 1

Takeaway03:23

Successful Investing Depends More on Behavior Than Prediction

The conversation rejects the idea that superior forecasts are the main source of long-term results. Sonders emphasizes disciplined behavior and warns that fully entering or exiting markets is a gamble requiring two precisely timed decisions.

The future direction of markets cannot be known reliably.
Investor actions are more controllable than forecasts.
All-or-nothing entry and exit decisions require two correct timing calls.
Successful investing is a process sustained over time.

“What matters is what we do along the way.”
Liz Ann Sonders · 03:48

“neither get in or get out is an investing strategy.”
Liz Ann Sonders · 04:41

#investor behavior#market timing#discipline#long-term investing