Win with Market Volatility

November 8, 2014


Market volatility is a top concern for investors according to a just released Advisor Top of Mind index of investor advisors. This index is based on a survey of a diverse group of 204 investment advisors. October certainly saw its share of volatility. The S&P 500 ended the month at an all-time high, up 2.32% for the month but with an 8.35% spread between its low on the 15th and high on the 31st. Many investors fear losing their gains especially after seeing the market extremes of the last few years.

Near-term expected volatility is measured by the CBOE Volatility Index® (VIX®) conveyed by S&P 500 stock index option prices. It is considered by many to be the world’s premier barometer of investor sentiment and market volatility. In October, the VIX spiked at over 25, the highest level since June 2012, from a low of 12.03 earlier in the month. Concerns over issues such as a slowing of world economic growth, the impact of political elections, ISIS, rising interest rates, and Ebola increase volatility.

It is interesting to note that this summer some investors were worried over too little volatility. Low volatility can lull market participants into a false sense of complacency. So is volatility bad or good? As an investor, the long term is more important to you than short term fluctuations. You develop a long term plan based on your own situation and risk tolerance and make investments to meet its goals. It’s important to focus on your long-term goals, that way you can keep a clear head during volatile markets.

Market volatility can be beneficial though. Richard Bernstein, Chief Executive Officer of Richard Bernstein Advisors LLC, believes uncertainty equals opportunity. He says, “It’s not volatility itself that leads to poor performance, but rather it appears to be investors’ emotional reactions to volatility. History suggests the best investment opportunities are in out-of-favor asset classes and sectors. We advocate taking a long-term investment view and not quickly reacting to market moves.”

How to Profit from Market Volatility

Volatility can be your friend. When it drives down some otherwise fundamentally sound stocks, adding some of these to your portfolio is often times the best move. When the market soars, you may decide to harvest some of your top holdings. Again, do this in a very reasoned manner. As an investor you’re not trying to emulate a trader selling a stock now and buying it back tomorrow. Keep an eye on macroeconomic developments and business fundamentals in determining where to put your investments because they impact the long range trend. Volatility reflects shorter movements and can have wide swings.

To win with volatility:
• Take a long term view
• Know the underlying trend
• Find opportunities in out of favor sectors
• Consider harvesting some that have soared

Market volatility can make investors uneasy, but it’s not always bad. We work with our clients to make sure they are in the proper investments to meet their long-term goals, while monitoring the opportunities volatility presents.