How to Diversify Your Portfolio in Markets Hitting Turbulence

Miami Beach recently hosted an investment-focused gathering that could be described as a paradise for finance enthusiasts. With around 2,500 financial professionals and advisors in attendance, the event was filled with experts ready to address a range of investment-related questions.

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Attendees explored topics such as effective wealth transfer strategies, evaluating private market investments, and managing inflation amid global economic uncertainty. The Future Proof Citywide conference was the go-to place for those seeking insights, with knowledgeable professionals only a few steps away.

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Despite the market’s recent volatility, the conference atmosphere was upbeat. One of the most highly attended sessions featured Michael Saylor, CEO of Strategy, discussing Bitcoin. This enthusiasm contrasted with the turbulence in financial markets, where deep declines in leading technology stocks have rattled investors. The uncertainty surrounding politics and the possibility of an economic downturn have contributed to an overall cautious sentiment.

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The Bloomberg Magnificent 7 Total Return Index has dropped roughly 14% this year, nearly 18% below its December peak. As technology stocks weigh down the S&P 500, investors have turned to diversification strategies. The event in Miami Beach showcased several alternative investment ideas through panel discussions and one-on-one conversations with industry professionals.

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Looking Beyond the U.S.: Europe and Japan

International markets have performed well this year, but analysts believe they still have room for further growth. Gabriela Santos, Chief Market Strategist for the Americas at J.P. Morgan Asset Management, pointed to the MSCI ACWI ex USA index, which currently trades at a 30% discount compared to the S&P 500. While this is a reduction from the 40% gap seen earlier in the year, it still surpasses the 20-year average of 15%, signaling potential opportunities for global investors.

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Santos views this shift toward international equities as a significant portfolio realignment, largely driven by corrections in major U.S. technology stocks rather than concerns about an impending recession. She believes that European and Japanese stocks, particularly financial companies, are attractive given the end of deflation and rising interest rates in those regions. Additionally, Europe’s industrial sector is benefiting from increased defense spending, particularly in Germany.

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In Japan, rising wages and stronger domestic consumption make domestically focused businesses appealing.

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The Importance of Diversification and Dividend Growth

Market turbulence presents an opportunity for investors to focus on fundamental principles, according to Bryan Armour, Morningstar’s Director of Passive Strategies. He emphasized that U.S. equities currently represent an unusually high percentage of investment portfolios, making this a favorable time to diversify by incorporating bonds and international stocks.

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“We can’t predict the future, so there’s no point in guessing,” Armour said. “Just maintain a diversified portfolio and be prepared for whatever comes next. A straightforward, long-term approach is often the best strategy.”

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One lower-risk investment approach is to focus on exchange-traded funds (ETFs) that invest in companies with a strong history of dividend growth. Armour highlighted the Vanguard Dividend Appreciation ETF (VIG), which prioritizes long-term dividend growers while excluding companies with the highest yields, as excessive yields can sometimes signal financial distress.

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For international exposure, there’s also the Vanguard International Dividend Appreciation ETF (VIGI). Additionally, the Schwab U.S. Dividend Equity ETF (SCHD) offers another option, emphasizing both dividend yield and company quality.

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Appeal of Mid-Cap Stocks

Mid-cap stocks may currently offer an attractive investment opportunity, according to Emily Roland, Co-Chief Investment Officer at John Hancock Investment Management. She noted that these stocks trade at a 30% discount to large-cap equities while maintaining higher profitability, better earnings, stronger balance sheets, and lower debt levels compared to small-cap stocks.

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For large-cap stocks, valuation concerns persist. Roland pointed out that large-cap equities are trading at 20 times forward earnings, which could make further multiple expansion challenging. Over the past two years, valuation increases have been the primary driver of equity returns, but sustaining this trend may prove difficult.

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Fixed Income: A Case for "Boring Bonds"

Alongside mid-cap stocks, Roland also favors bonds, particularly those with intermediate maturities of seven to ten years. She believes fixed-income investments remain underappreciated, arguing that they are currently mispriced and deserve greater attention.

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“People often overlook bonds because they seem ‘boring,’ but they offer a solid income stream,” Roland said. “Given today’s high yields, investors have an opportunity to lock in a reliable source of income for years to come.”

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With the aggregate bond index offering a yield of approximately 4.7% and investment-grade corporate bonds yielding around 5.25%, Roland sees these as compelling opportunities. She emphasized that fixed-income investments carry significantly lower risk compared to equities, making them a valuable portfolio stabilizer.

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For those interested in bond funds, a recent Morningstar report highlighted the potential advantages of actively managed fixed-income strategies. The study found that active bond managers tend to outperform passive bond funds more frequently than stock-pickers outperform index-tracking equity funds.

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Active bond managers can take calculated risks in a way that provides a lasting edge,” Armour explained. “However, investors should be mindful of costs and focus on strategies with the highest likelihood of success.”

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As financial markets continue to experience fluctuations, many investors are reassessing their portfolio strategies. The investment conference in Miami Beach reinforced the importance of diversification, particularly as high-profile U.S. stocks struggle. Experts encouraged investors to look beyond domestic equities, consider fixed-income assets, and explore opportunities in international markets.

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With valuations stretched in the U.S. and economic uncertainty persisting, taking a balanced approach may prove beneficial. Whether through dividend-focused ETFs, mid-cap stocks, or carefully selected bonds, maintaining a well-diversified portfolio can help investors navigate an evolving financial landscape.

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