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Volatility will always play a part in the performance of the stock market, but you can help mitigate the volatility in your own portfolio by investing in asset allocation mutual funds.
Asset allocation funds are designed to attempt to reduce volatility by spreading assets around to several different types of investments, including a variety of equity securities, bonds and other fixed income securities.
Although diversification – with several asset groups feeding into the performance of the portfolio – does not eliminate risk, it may help reduce losses during stock market fluctuations. For instance, when the prices of small cap stocks are falling, U.S. blue chip stocks or international stocks within the portfolio may be moving up, along with bonds and other debt-related assets.
It is important to note that bonds can also be volatile, particularly in times when credit quality comes under pressure or when interest rates are changing. However, over longer terms, bonds have historically had lower volatility than stocks. The two asset classes can often be correlated in the opposite direction (when stocks go down, many bond sectors tend to rise), so while multi-asset portfolios could have lower returns over the long term than an all-equity index like the S&P 500®, a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks, they will usually have lower volatility, too, often resulting in a smoother ride for investors.
The chart below shows the returns and standard deviation of returns (volatility) over a recent period for five different Morningstar Target Risk Indexes that represent various levels of diversification (with a mix of assets that may include stocks, bonds and other types of investments). The baseline is represented by the S&P 500, which shows an annualized return of 9.52% and a standard deviation of 14.64%. All five indexes had lower standard deviations than the S&P 500. Four of the five had better returns per unit of risk than the S&P 500 as well.
Thrivent Mutual Funds offers four different asset allocation funds that range from moderately conservative to aggressive. Although each of the Funds has an asset allocation target, the actual allocation can vary depending on the outlook and judgment of the Fund managers. The Funds are actively managed by a team of more than 100 investment professionals.
For example, Thrivent Moderately Aggressive Allocation Fund has a target asset allocation of 80% equity securities and 20% fixed income securities, but the actual allocation typically varies somewhat as the Fund manager makes adjustments in the holdings to react to changing market and economic conditions.
Thrivent Moderately Aggressive Allocation Fund typically invests in more than a dozen different asset groups. The largest group has been large capitalization U.S. stocks, which typically accounts for over a third of the Fund’s total assets. The Fund also invests in several other equity groups, including international, small cap, and mid cap. Bonds and other debt instruments make up the balance of portfolio assets, led by securitized debt, investment grade credit, short-term bonds and cash, and government bonds. Other bond instruments include high yield bonds, floating-rate bank loans and international debt.
The diversification of these asset allocation funds makes them less volatile than the performance of a single equity category, such as a fund that invests primarily in mid-cap stocks. Although the more conservative portfolios would tend to have lower potential returns over the long-term, their losses tend to be more modest and less frequent than the more aggressive investments, and they tend to have lower volatility.
To gauge relative volatility, investors often use a metric known as “beta.” Beta is a statistical measure of the volatility, or market risk, of an investment compared to a benchmark. The lower the beta, the lower the volatility of the investment compared with the benchmark.
The S&P 500 composite index is considered a beta baseline, with a beta of 1.0. Anything over 1.0 is considered more volatile or risky than the market and anything under 1.0 is considered less volatile and less risky. For example, over a recent three-year period through December 31, 2021, Thrivent Moderately Aggressive Allocation Fund – Class S had a beta of 0.75, which indicated that it was 25% less volatile than the S&P 500 during that period.
In addition to the Thrivent Moderately Aggressive Allocation Fund, Thrivent also manages three other asset allocation funds, giving investors with moderately conservative to aggressive risk tolerances the opportunity to choose a portfolio suited to their objectives and threshold for risk:
Thrivent Mutual Funds has over 20 mutual funds, spanning most major asset classes, to help investors build diversified portfolios.
Although asset allocation funds cannot shelter you entirely from the ups and downs of the market, they can lower your exposure to the stock market and help reduce the volatility of your own portfolio over the long-term.
Learn more about Thrivent Asset Allocation Funds.
All data represents past performance. Past performance does not guarantee future results. The investment return and principal value of the investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance data quoted. Visit thriventfunds.com for performance results current to the most recent month-end.
Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
Asset Allocation Fund Risks: The value of the Funds is influenced by a number of factors, including the performance of the broader market, the effectiveness of the Adviser’s allocation strategy, and risks specific to the Funds’ asset classes, market cap groups, investment styles, and issuers. Markets may also be impacted by domestic or global events, including public health threats, terrorism, natural disasters or similar events. Debt securities are subject to risks such as declining prices during periods of rising interest rates and credit risk, or the risk that an issuer may not pay its debt. The Funds invests in a combination of other funds managed by the Adviser and direct investments in equity and debt instruments therefore the Funds is dependent upon the performance of the other funds and is subject to the risks, additional fees and expenses of the other funds. Foreign investments involve additional risks, such as currency fluctuations and political, economic and market instability, which may be magnified for investments in emerging markets. The London Interbank Offered Rate (LIBOR) is being phased out, which brings uncertainty to instruments tied to it. The Adviser's assessment of investments and ESG considerations may prove incorrect, resulting in losses or poor performance. The Adviser is also subject to actual or potential conflicts of interest. The use of quantitative investing techniques and derivatives such as futures also involve risks. High yield securities are subject to increased credit risk as well as liquidity risk. Leverage loans, U.S. Government securities and mortgage-related and other asset-backed securities are subject to additional risk. The Funds may engage in active and frequent trading of portfolio securities, which may result in higher transaction costs and higher taxes. When interest rates fall, certain obligations will be paid off more quickly and proceeds may have to be invested in securities with lower yields. These and other risks are described in the prospectus.
The Morningstar Target Risk Index family consists of five indexes covering risk preferences ranging from Aggressive to Conservative. The indexes utilize asset allocation methodologies developed and maintained by Ibbotson Associates to determine underlying index weighting. The five target risk indexes include: Aggressive (95% equities and 5% bonds), Moderately Aggressive (80% equities and 20% bonds), Moderate (60% equities and 40% bonds), Moderately Conservative (40% equities and 60% bonds) and Conservative (20% equities and 80% bonds).
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