By Lewis Braham

Markets hate uncertainty. Yet the risk tolerance of individual investors varies. Some can tolerate more uncertainty than others. A few can even profit from the volatility that chaos brings.

President Donald Trump has proved himself to be an agent of chaos with his aggressive tariffs and attacks on government agencies. Any disruption to the government is a threat to investors, and he has injected more uncertainty into markets than any politician in recent memory. For investors with a moderate-to-low risk tolerance, building a chaos-resistant portfolio with funds not correlated to the tech-heavy S&P 500 index can be the difference between knowing they can still achieve their financial goals and not being able to sleep at night.

Disregard bromides like "ignore the political noise" in such an unusual environment. The interconnected nature of governments and capital markets has always meant that investing shouldn't be apolitical -- now more than ever. The U.S. government is the world's largest bond issuer, with $28 trillion of Treasuries outstanding. The credit quality and interest rates on those "risk free" bonds often determine the behavior of the rest of the securities markets, with stocks rising or falling by how low or high the interest rate is on government debt.

That doesn't even include the U.S.'s role as a regulator of financial markets; its fiscal, monetary, and tax policies influencing those markets; and the trillions more in government-sponsored mortgage bonds and state-issued municipal bonds. Moreover, our government is the largest consumer of healthcare and defense, two major stock market sectors.

Voters elected Trump specifically as a populist disrupter. He's doing what they asked. While Democrats call Trump an autocrat for consolidating power in the executive branch, that's largely irrelevant to Wall Street, as money managers have happily invested billions in authoritarian or quasi-authoritarian regimes -- Russia, China, India, and Turkey, to name a few -- in the past, albeit with mixed results. The problem now is that with limited checks from other government branches, investors are increasingly dependent on Trump's whims, whether they consider him pro-business or not.

Right now, he seems anti-investor. Consider the president's hostile tariff policy, which The Wall Street Journal editorial page dubbed "the dumbest trade war in history." Then there's his claims of widespread fraud in Treasury bonds. Firing thousands of federal workers -- some of whom regulate securities markets -- doesn't build confidence, either. The potential privatization of mortgage bond sponsors as well as Medicaid cuts could also send shock waves through the market.

Does that mean investors should adjust their holdings? Depending on their risk tolerance, it could. Thankfully, Wall Street offers many investment products to help derisk your portfolio.

Cash

The most obvious form of downside protection is cash. In the first two months of 2025 alone -- the most recent fund-flow data available -- some $111 billion of new investor money went to money-market funds, dwarfing U.S. equity funds' $13.5 billion. The most popular was the Vanguard Federal Money Market fund, which took in $15.1 billion in January and February. It recently yielded 4.2%.

Money-market funds are useful in an inflationary environment, which the tariffs might trigger. The ultrashort maturities of money-market debt allow funds to adjust quickly to higher interest rates.

Yet many financial advisors don't consider cash a real investment because of its lower potential returns. Shaun Williams, a partner at Paragon Capital Management in Denver, prefers bond funds to money markets in his clients' portfolios. But he still sees cash as playing a role in a separate emergency fund.

Here's where risk tolerance comes into play. The better your financial situation, the more stable your job, and the further you are from your retirement, the less cash or other hedges you need. "Someone close to retirement or in retirement, has a lot less time to recover," Williams says. "But if you're a young person in your 30s or 40s and saving, you actually would love to see the whole stock market take a bath, because then you can buy more [stocks] at that low price." Investors with high-risk tolerances can use the chaos that Trump brings as a buying opportunity, as long as they have the wherewithal to hold for years.

For clients in more precarious situations -- such as government employees facing mass layoffs -- Williams advocates having the equivalent of a year's worth of expenses in a cash emergency fund. For others, in fact, a two-year cash buffer might make more sense.

Bonds

Bonds have proved to be defensive this year, indicating that investors don't believe that Trump will really cancel any Treasury payments. The popular $125 billion indexed Vanguard Total Bond Market exchange-traded fund is up 2.8% year to date. But the index fund has a long portfolio duration of 5.9 years, indicating that it will fall 5.9% for every one-percentage-point increase in rates. If inflation backs up again because of tariffs, long bonds will suffer. (Bond prices move inversely to rates, and the longer their maturity or duration, the more sensitive to rates they are.)

Because of these concerns, Williams invests in the CrossingBridge Low Duration High Income fund. It has a duration of only 0.62 year, so rate increases barely affect it. Yet it beats money-market funds with a strong 6.7% five-year annualized return and returned a positive 1% during the brutally inflationary 2022, when the Vanguard index fund lost 13%.

While CrossingBridge lead manager David Sherman buys bonds with low credit ratings, he has greater visibility regarding their likelihood of default because of their shorter maturities. He insists that each bond have a strong catalyst for the company paying the debt off. As an example, he points to Clear Channel International, a foreign subsidiary of outdoor advertising company Clear Channel Outdoor Holdings, which is paying off its European debt so it can qualify to become a real estate investment trust. "A lot of times, lenders aren't aligned with shareholders," Sherman says. "But here they want to pay off their debt."

A good companion to CrossingBridge is FPA Flexible Fixed Income, which, despite its flexibility, is run by conservative managers. The fund has a higher duration risk than CrossingBridge, at 3.36 years, but boasts a higher credit quality. Though it can invest as much as 75% of its assets in high-yield debt, it currently has only about 5% there and 69% in debt rated AAA. The manager, Abhijeet Patwardhan, who runs this fund also runs the even more conservative FPA New Income. That fund has had positive 12-month returns 97% of the time in its 40-year history, barely falling 3.2% in 2022.

Williams generally combines the short-duration CrossingBridge fund with more-traditional longer-duration bond funds to create a "barbell duration" portfolio that can perform well in different economic environments.

Gold

Gold bullion is the oldest hedge. It offers especially useful protection against geopolitical uncertainty in the U.S., as gold tends to be inversely correlated with the dollar, the world's reserve currency. Central banks worldwide have been accumulating more gold recently, especially as geopolitical risks have increased. The SPDR Gold MiniShares ETF was up 26.5% in 2024 and rose 19.3% in 2025's first quarter.

"Gold doesn't really have a relationship with anything else you'd find in a typical portfolio, so it's offering you a level of diversification that few other assets can match," says George Milling-Stanley, chief gold strategist at State Street Global Advisors. "Since President Nixon created a free market in gold in 1971, the correlation with the S&P 500 has been 0.03%, statistically zero. The correlation with the bond market over a similar period has been 0.09%, which is also statistically zero." Although gold has had hot and cold streaks since 1971, the annual average increase in the gold price has been about 8.5% a year, he says.

In model portfolios that Milling-Stanley has backtested, he found the optimal portfolio weighting for gold to maximize risk-adjusted returns to be 10%, but even 5% helps in volatile markets.

Alternative Funds

Hedged mutual funds can prove useful if both stocks and bonds fall. Two money managers -- AQR and BlackRock -- have built a stable of successful ones. AQR's managers ran hedge funds from the firm's founding in 1998 before launching their first hedged mutual fund -- AQR Diversified Arbitrage -- in 2009, so they have a lot of experience.

Jordan Brooks, co-head of AQR's macro strategies group, says there are two ways to address the current uncertainty. "Camp one is to build a portfolio that's negatively correlated with chaos and profits from it," he explains. "That's a hard thing to do and still have a positive expected return. The next best thing is to build a portfolio that's uncorrelated to chaos. It doesn't mean it always makes money, but it's not going to be hypersensitive to the state of the economy or macroeconomic shifts."

The alternatives that AQR manages largely employ the latter uncorrelated strategies. They won't win every time the market's down, but they won't lose whenever it's up. The best-performing of its funds, AQR Long-Short Equity, has a 11% 10-year annualized return while having a low 19 R-squared ratio during that period, indicating that the fund's price moves were correlated with the S&P 500's only 19% of the time. By betting both for and against stocks throughout the world via long and short positions, the fund neutralizes most of its market exposure.

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April 04, 2025 02:00 ET (06:00 GMT)

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