finances

EMBRACE VOLATILITY

If you are invested in the stock market either through individual stocks, mutual funds, or exchange traded funds, you know volatility comes with the territory. You can either run from it or embrace it and use it to your advantage. It’s no secret that 2020 has been a very unusual year. And, it’s also been unusual in the financial markets in terms of volatility. In fact, the S&P 500 Index suffered its fastest 30% drop of all-time. All-time is a long time. A key indicator of the level of volatility in the stock market is the Volatility Index, also known offered the ballast one needs to reduce volatility. Generally, when stocks have experienced quick sharp downturns, bonds have been the investment where investors have turned. Oftentimes, bonds will tend to move opposite of the stock market during times of high equity volatility. There are a number of other asset types that can reduce volatility, including real estate investments which have offered a nice way to diversify equity by Karl Eggerss – Covenant, a Registered Investment AdvisorI as the VIX. The VIX is typically in the mid-teens under “normal” allocations in a portfolio. conditions but is prone to moving higher when stock markets The quandary for investors in 2020 is whether decline, especially in the midst of a major economic event. For bonds will offer the same volatility reduction in a example, on March 16th, 2020, the VIX reached almost 83 from portfolio they have in the past. Afterall, interest a low starting point of only about 14 in mid-February. That’s a rates are near historic lows and according to the nearly 6x move in thirty days. With the VIX moving violently Federal Reserve, they may stay there for years. higher, it was not surprising to see the stock market in freefall. Investors are continuing to look for ways to earn

Yes, volatility comes with investing in stocks, but over time a reasonable return without taking on all the investors are rewarded for bearing that volatility. JP Morgan has inherent volatility of the stock market. There are data going back to 1980 showing the average intra-year drop now various funds that invest in volatility as an has been 13.8%. However, annual returns have been positive asset class, and can offset the risk of catastrophic 30 of the 40 years. This data illustrates that those investors who portfolio losses during large equity market used the temporary dips were rewarded by purchasing equities declines. These types of funds can act as a “shock at lower prices. absorber” at times of extreme volatility and

When it comes to building an overall balanced portfolio, investors need to determine 3 things: 1. When will they need the invested money? 2. What type of volatility will they stick with? 3. What investments will help them achieve their long-term goals?

Time in the market matters. The longer one holds individual stocks or stock funds, the more likely the returns will be positive. However, volatility is scary and it can cause you to make poor decisions under duress when volatility is high and the world seems as if it is coming to an end. Time and again despite how dark the outlook, the world has not ended, but yet during every event, a large number of investors sell just before stocks begin to recover.

They key to avoiding membership in that unfortunate investor group is to control the volatility of your portfolio through disciplined diversification. For example, bonds have historically complement the rest of your portfolio allocation.

While there is no silver bullet when it comes to investing and nobody can certainly eliminate volatility, there are ways to navigate around it, and in some cases use it to your advantage. It’s always important to seek an advisor to help give you options and assess your risk and goals. BBM

Karl Eggerss is senior wealth advisor and partner at Covenant Multifamily Offices, LLC. 114 E. Highland Dr. – Boerne 210.526.0057 creatingricherlives.com