Volatility Isn’t the Enemy: A Smarter Way to Manage Risk with Wes Crill

I love myth busting, so this is a episode right up my alley.

[00:00:30] Doug Heikkinen: So let's jump right in. Many investors today are looking for ways to volatility proof their portfolios. From your perspective, what are the biggest misconceptions driving that mindset?

[00:00:41] Wes Crill: I think a consideration along those lines is the trade off that you might have to make. When you talk about taking away something like volatility, you're not going to be able to do that for free. I sometimes compare it to, if you were to make a list of all the foods you love to eat because they're delicious, and all the foods that you should be eating because they're healthy, there's not always a lot of overlap in those.

And so if you want to emphasize the health side, then you gotta give up some of the pleasure. And then if you want to emphasize pleasure in eating, then you gotta give up some of the healthy diet. And so investors should expect a similar proposition awaits them if they want to reduce their volatility, which there are a number of ways at our disposal that we can do that. You're likely going to have to give up something. That might mean expected return. And so I think that's a good place for investors to start.

[00:01:22] Doug Heikkinen: Offer and defined outcome funds have become increasingly popular as tools for managing volatility. How do you view these products compared to Dimensional's more fundamentals driven approach?

[00:01:34] Wes Crill: Yeah, you mentioned popularity. There's been about 50 of the funds in that category, in the ETF landscape, launched in the first half of 2025 alone. About $7 billion worth of flows in that category. So clearly it's something investors are seeking out. And again, I think it goes back to this idea that in either turbulent markets, or maybe if there's the fear of further market turbulence, investors might be looking for ways to reduce their volatility.

And that can be done through some of these defined outcome funds. But one way that we know, that investors already have at their disposal, is to combine risk management asset classes. So if you have fixed income or bond funds, when you combine those with your equity or stock funds, that's already a very proven way to reduce your overall portfolio of volatility. And what the data have shown us is that you can get similar outcomes from the so called defined outcome funds, but it might come at a higher cost. The average expense ratio for the funds that are in that category as of the end of June was about 80 basis points, and that's relatively high when we think about ETF strategies.

And so something for investors to consider because they might already be able to accomplish that ultimate objective with traditional asset classes.

[00:02:45] Doug Heikkinen: Historically, global diversification and disciplined portfolio construction have been key defenses against volatility. Are those principles still effective in today's market environment?

[00:02:57] Wes Crill: I think one of the contributions you can get from global diversification is not having your portfolio being impacted, by an outsized amount, by one certain region. The classy example of this and something that is probably well in the rear view mirror for many investors these days is the lost decade in the US where from 2000 through 2009, the S&P 500 was essentially flat. That's a long stretch of time to not get an equity premium from a region like the US. But at that same time, you look outside the US, especially smaller segments of the market, like companies with smaller market capitalization, one's trading at lower valuation ratios. Outside the US, those companies were doing very well over that stretch of time.

And so that's one of the key benefits you get from global diversification is reducing the range of outcomes. Sometimes we just talk about volatility as standard deviation, but there's also just the range of outcomes and global diversification is a good way to reduce that.

[00:03:53] Doug Heikkinen: Here's another potential myth. Some investors believe avoiding concentrated positions is enough to control volatility. What's missing from that thinking?

[00:04:02] Wes Crill: So that one, there's a bit of a nuance because there's two different kinds of volatility. There's systematic volatility. This is what you get with having exposure to the broad market. It's going to be subject to whatever's going on in the world, whether it's geopolitical conflict, macroeconomic, environmental changes. You can't diversify away from that. And that, because it's non diversifiable risk, you get compensation through the form of higher expected returns. When people talk about concentrated positions, what they're probably alluding to is what we call idiosyncratic or stock or company specific risks. One classic example is if I only invest in companies that make umbrellas, maybe my cash flows suffer during the summer when there's less rain. But if I diversify my portfolio by adding in a stock of a company that makes sunscreen, then what I've done is effectively offset the market forces that would impact one of those with a holding in the other. So we see that going beyond a small number of stocks can mitigate the extent to which company specific risk is impacting you. And that's important because that risk is diversifiable, which means you don't get compensated for it. So those are uncompensated bets that investors might be taking if they're only invested in a handful of companies.

[00:05:16] Doug Heikkinen: All right. Let's talk fixed income. It's long been seen as the ballast in diversified portfolios, but with shifting rate environments, how has its role in volatility management evolved?

[00:05:29] Wes Crill: It's still a great way for investors to diversify. It's, traditionally has, not to say it's the ying to equities yang, but we see that in months when the stock market has been negative for the US, US government bonds have been up, and pretty substantially. About 30 basis points per month on average.

And so that's a complimentary benefit. That's really the role of diversification there. And It's been something that's been very consistent through time. I know there's been a lot of consternation over, in recent years, rising correlations between stock and bond markets. And some people point to that and say, is this undermining the diversification benefit I get from fixed income? The correlation between stocks and bonds is very volatile. It's ranged from minus 0.5, deposit at 0.5, and everywhere in between over the past a hundred years. But over that stretch of time, the benefit from holding bonds in addition to stocks has been very consistent. A 60/40 Combination where it's 60% in stocks, 40% in bonds, has had about 35% less volatility than a hundred percent stocks alone.

And that's been a very consistent volatility reduction regardless of what was going on with correlation. So we continue to believe that for investors who are, again, looking to manage risk, looking to narrow the range of outcomes from their invested wealth, fixed income can be a key part of that puzzle.

[00:06:48] Doug Heikkinen: Can you share how Dimensional's famous research or philosophy challenges the idea of volatility proofing as a goal itself?

[00:06:57] Wes Crill: I would say that a key part of our philosophy is that markets are forward looking. That current market prices are the best prediction of the future. Now that's going to include expectations for the future. So the extent to which, let's say, the macroeconomic climate is expected to change or geopolitical risks, some of the other things I've mentioned, those are reflected in current market prices. But what is not reflected is things that are unexpected, things that are going to happen in the future that we can't know right now. They call it news for a reason. It's not called the olds. So that's where you're going to want diversification because whatever happens in the future, it could impact just a small segment of the market. If you are only holding that segment of the market, let's say you're only holding the 10 largest companies in the US market, and those happen to be the companies that suffer during some sort of change in the economic climate.

Then you're going to have a bigger negative impact on your portfolio than if you were broadly diversified, where maybe at that same time, another group of companies is faring particularly well, better than expected, and maybe their prices are rising. And so I think that's one of the key aspects. And then any misconceptions around the idea that you can reduce volatility without giving up expected return.

Remember, this goes back to my diet analogy, which is that's like you telling me I'm eating absolutely delicious foods, and by the way, I'm reducing my cholesterol at the same time. You're probably going to have to give up something and I think that trade off is something that's very apparent if you believe in the power of markets, because markets don't give you anything for free.

[00:08:21] Doug Heikkinen: How do you help advisors communicate to clients that volatility is not a risk to avoid, but rather an element to manage productively?

[00:08:30] Wes Crill: The first thing I always mention is that volatility is a normal sign of a healthy market. Because what happens as we just proceed through a time is there's changes in information. There's news that comes out. That news is going to be relevant for stock prices. So you should expect to see prices move sometimes in a very meaningful way, depending on the severity of that news. You go back to really the onset of the tariffs announcement back in April, and you see a huge draw down in markets. That was the market changing their expectations for the future, the cash flows that they expected from corporations, and then reflecting those changes in expectation, new prices they're willing to pay.

If you didn't see any market movements upon the onset of that news. Then that would be honestly an indication that maybe markets weren't properly functioning. So they're setting new expectations through that price forming process. So you should expect that as you go through time. And again, you don't necessarily want to avoid volatility altogether because most investors need a growth source in their portfolio.

They're going to need something like stocks to grow the value of their portfolio, unless you're already set for life and maybe you can afford to be all in fixed income, but most of us are going to need a little extra juice for our return. And again, you're not going to get that for free. That's going to come along with a dose of volatility. So then it becomes about managing, okay, how much exposure do I get through these riskier assets versus what are my goals? What's my time horizon for investing in all of those things? But volatility in and of itself is not something to avoid. In fact, it's something many investors probably need to embrace provided, like I mentioned earlier, it's systematic volatility that you're getting compensated for and not that idiosyncratic volatility that you could diversify away.

[00:10:05] Doug Heikkinen: In your experience of working with advisors, where do you see the biggest gap between the way volatility is perceived and how, it actually impacts long-term performance?

[00:10:15] Wes Crill: Yeah, I'm glad you mentioned the term long term there. I think a lot of it really comes down to the time horizon over which most investors analyze their investment performance and what is probably most relevant for their goals. So if I'm saving for something that's 10, 15, 20 years down the line, looking at what's happening on a day-to-day basis in markets is probably not relevant. Because a daily market movement of say 1%, that happens relatively frequently. Even a downturn of 10%. That's happened in many, many, many years historically for the US market. But in many cases, the market recovers. Expected returns are always going to be positive.

And so we expect the market to come back. One of the things I always joke about is, if you can possibly help it, just select your account statements to be only sent to you every other year. Don't know if that's an option anymore, but that's one way to think about just tuning out the noise of the daily market movements and keeping the focus on the long-term, which is where your goals ultimately are.

[00:11:11] Doug Heikkinen: How Should advisors evaluate newer volatility products versus traditional disciplined equity approaches, especially when clients are attracted to short-term downside protection.

[00:11:21] Wes Crill: Yeah, it's something, there's a couple of things that you can do to, I think, insulate yourself from jumping on whatever the latest flavor of the month is. And the first is just to think about what you already have available to you. What is this new, whether it's a fund or investment category, what is it adding that you already have? By the way, this is especially relevant when people are thinking about artificial intelligence these days and what kind of investments they need to be in. When we look at the top five artificial intelligence themed ETFs, almost half of the stuff that is in those ETFs is in the broad equity market portfolio. And a lot of it is overlapping with things that you already have. So you always want to think about, is this adding something new? And then you revisit the concepts of, the two goals for any asset in my portfolio are, is it increasing my return, or is it helping me manage risk? And if it's not adding anything beyond what I already have, it's hard to say what kind of risk it's managing.

And if I'm thinking about the performance of my portfolio, then I want to assess, okay, I've got this new ETF that might be overlapping with what I already have. Does it do it in a more cost effective way than what I'm already possessing in my portfolio? And so I think when you go through that sort of checklist and just be very cognizant that the motivation for many funds to be launched out there is not necessarily to make you more money. It is because maybe there's popularity in an asset category and some fund managers out there will take advantage of that and they will launch strategies to gather new assets. That's not the same thing as them trying to help you achieve your financial goals.

[00:12:48] Doug Heikkinen: Last one for you, and let's look ahead a little bit. What principles or frameworks do you think will define the most resilient advisor portfolios over the next few years as volatility remains a constant feature of markets.

[00:13:01] Wes Crill: I think again, you go back to the idea that diversification is your buddy. That broad diversification prepares you. We always like to say at Dimensional, we don't want to predict the future, because again, we don't know what's going to happen in the future, but we want to be prepared for it. And by having a systematic investment approach, one that is very rules-based, that can help weather, thicken the thin when it comes to financial markets. Historically that's been the best way to navigate market volatility and uncertainty. And so I think to the extent that you can employ that type of investment approach, it's rules-based, it's cost-effective, again, broadly diversified. That seems to be the best way to go about these things. There's no magic bullet when it comes to persevering in markets.

[00:13:45] Doug Heikkinen: Wes, there's a lot of ways we can describe the world and I guess maybe the best one is, it's an interesting place out there right now. So thanks for so much to talk about volatility, because it's going to be with us for a while.

[00:13:56] Wes Crill: Yeah. thanks for having me.

[00:13:57] Doug Heikkinen: For more information about Dimensional Fund Advisors, please visit them at Dimensional.com.

We are on all social media platforms @Advisorpedia. Please give us a visit. For our producer Tory Miller, and the Power Your Advice podcast team. This is Doug Heikkinen.