Chasing the greatest upside over the short to medium term has become a common goal of many beginner investors. Pursuing such an investment strategy carries a considerable amount of downside risk that I believe a big chunk of new do-it-yourself (DIY) investors may be downplaying. Most of today’s investors haven’t been invested through a real market crash, and they’re in danger of overestimating their investing abilities as a result.
Unless you’re a seasoned pro at spotting and reacting to macroeconomic trends, you, like many other do-it-yourself investors, would be better served by “surrendering” to market volatility rather than trying to time entries and exits out of the market or by going “all-in” on a stance, whether it’s bullish or bearish.
There are far too many contingent events that could derail a bullish or bearish thesis, so I believe investors would be best served by playing both sides of the coin (bullish and bearish) by adopting a risk-parity strategy. Doing so will allow one to profit when the markets go up and avoid being obliterated when the next inevitable implosion hits.
If you find you’re overexposed to cyclical stocks like Magna International, a name that’s highly sensitive to big swings depending on where we’re at in the market cycle, you may want to consider rebalancing your portfolio to include defensive dividend-paying companies like Fortis (TSX:FTS)(NYSE:FTS) instead.
Fortis has a recession-resistant operating cash flow stream, and although the name won’t grant you the most upside in an economic boom, it will act as a foundation of stability for your portfolio when things start getting ugly.
Foolish takeaway
During the financial crisis, Fortis stock dropped around 26% from peak to trough, and that’s not even taking into account the dividends that continued to be paid out to investors at a time when distribution cuts were the norm for many cyclical players that saw their operating cash flows evaporate.
Fortis is way better than any risk-free asset at today’s depressed valuations. It’s the perfect insurance policy for your portfolio and a must-have for any investor regardless of how optimistic they may be on the state of the economy.
Stay hungry. Stay Foolish.
