Tag Archives: volatility

How to stop worrying and embrace market Volatility

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By WisdomTree ETFs
Following one of the most tranquil years in stock market history, volatility came roaring back in late January and early February. Many investors were calling for the inevitable return of volatility in 2018, ourselves included. That said, few foresaw how quickly and how violently that prediction would come to fruition. While there was some debate as to what exactly prompted the pickup in volatility (with everything from inflation to inverse volatility exchange-traded products to the all-encompassing “quants” being blamed), the bottom line is that the spike in the Volatility Index (VIX) left equity investors running for cover.

 

One thing we found interesting was that during the height of the correction, the MSCI Emerging Markets Index outperformed the S&P 500 by almost 150 basis points on the downside, with other emerging market (EM) strategies holding up even better.1 Given that the EM asset class historically has had a standard deviation about 50% higher than that of the S&P, EM investors who may have expected the performance of EM to be worse than that of the U.S. were likely pleasantly surprised.

Valuation’s impact on Beta

The EM outperformance brings to mind a concept that Jeremy Grantham has written about: beta is a critical component of explaining relative performance, but valuation can influence beta. Assets that are more expensive relative to their history may experience volatility above their expected levels (and vice versa). When an asset’s price outruns its fundamentals, a downturn in the market can be disproportionally negative when the music stops.

This is the exact same idea that underpins WisdomTree’s original investment philosophy and why we focus on fundamentals. Regarding those fundamentals, within EM we remain encouraged by corporate earnings and believe that the attractive valuation currently offered by the asset class is being underappreciated. As such, the recent sell-off may have provided us with a live case study that validates the dynamic beta concept.

Using Volatility as a Buy signal

As our Chief Investment Strategist Luciano Siracusano recently noted, when the VIX spikes upward, the following 12 months historically have seen strong returns for the S&P 500. Taking it a step further, while elevated VIX levels have portended good times for U.S. equity investors, EM equity investors have had even greater reason to cheer. Continue Reading…

Is fear keeping you out of the stock market?

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The biggest concern for many investors is the fear of losing their money. The stock markets have shown some volatility the last few weeks, and the recent screaming headlines in the financial media do nothing but encourage panic.

Some people think the latest bull market has overvalued stocks and a major market meltdown is imminent. They are sitting on their cash and waiting for the right entry point.

According to a BlackRock survey, 70% of adults aged 25 to 36 are also clinging to cash assets. Apparently, these Millennials don’t have much trust in the stock market and are afraid of another large market crash. This puts them at risk of not having enough saved to enjoy a comfortable retirement.

It’s true. Investing in equities does carry risks. Market corrections (drop of about 10%) are common. Bear markets (drop of 20% or more) will likely occur during an investor’s lifetime.

Even a reasonably diversified portfolio of stocks lost about half of its value during the 2008-2009 market crash. However, avoiding equities completely isn’t the best strategy. The stock market can be good to investors who have the discipline.

What can you do to get over your stock market fears?

1.) Educate yourself

Combat your fears with knowledge. Learn the basics: how the markets work so you can prepare yourself for future market conditions. The more you know, the less afraid you become, but avoid information overload.

Stop reading the gloom and doom reports in the financial media. Your financial education should not come from the news media. They need something to report and tend to sensationalize short-term market events to grab our attention. Just because something appears in print doesn’t guarantee that the information is correct. Look for reliable sources.

Investing magazines and books can provide useful information.

Knowledge is freely available on the Internet. Basic investing information is available at sites like Get Smarter About Money and Canadian Securities Administrators. Some social media sites, forums and financial blogs are worthwhile if written by knowledgeable authors.

Lack of confidence and second guessing yourself can paralyze your decision making. If you’re afraid of picking the wrong investments, turn to a professional for help. You could also try one of the many well-publicized model portfolios that have yielded good returns.

2.) Take a long-term investing approach

The biggest fear of investing is losing a lot of money in a short period of time.

Investing is a long-term process and is most likely your only way to reach your long-term financial goals.

Consider the benefit of investing sooner rather than later. Time is on your side.

Don’t keep monitoring your portfolio. This is psychologically hard, but don’t let short-term losses bother you too much. No one likes losing money, but it will be temporary. You’re not going to need this money to survive tomorrow, or next month, will you?

Acknowledge short-term market risks, but trust in long-term historical gains and commit to long-term investments. Continue Reading…

Worst day ever for stocks?

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Will Monday February 5th go down as the worst day ever for stocks? On this day the Dow Jones industrial average lost more than 1,175 points:  the worst single-day point drop in its history. But was it really the worst day ever? Investors need some context.

The 1,175 point drop was indeed the biggest single-day point loss the Dow has ever sustained. But let’s remember the Dow has been soaring almost uninterrupted since March 2009 when it bottomed-out at 6,627 points during the global financial crisis. By the end of January 2018 it had reached a record 26,616 points.

Related: Have we reached peak stock market?

Better to forget about points and focus instead on percentage gains and losses. Taken in this context the headline reads a bit different. The Dow plunged 4.6 per cent: its worst day since August 2011. It doesn’t sound nearly as gloomy.

Another way to frame this day is that the stock market has erased its gains from the start of the year. But 2018 is just one month old.

Where does this day rank in terms of largest one-day percentage drops in history? Will it live on in infamy like Black Monday, Black Tuesday, the Flash Crash, or the aftermath of the September 11th attacks?

Nope, not even close.

If you were thinking Monday’s 4.6 percent drop was a bloodbath then how would you have reacted to one of the top 20 largest daily losses of all time? This wasn’t even a blip on the radar.

Related: What can you do about the upcoming stock market crash?

Continue Reading…

7 tips for investing in the Trump era

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Investors are inquiring how to invest their nest eggs after the U.S. election and the unexpected win by Donald Trump.” Let’s keep it very simple and explore a dose of reverse engineering. I highlight seven top tips for adoption:

USA presidential election donald trump, vector illustration, Editorial use only

1.) Ask where you want your nest egg to be in five, ten or twenty years.

2.) It’s imperative to always think and act logically, not emotionally.

3.) Accept that bond and stock market volatility is here to stay.

4.) Revisit your expectations as to goals, needs, objectives and plan of action.

5.) Implement, tweak and be patient with your long-term strategies.

6.) Cut to the chase and focus on managing your investing risks.

7.)  Keep cash available for buying opportunities during market sell-offs.

These straightforward, sensible tips can stickhandle your nest egg out of trouble most times.

AdrianAdrian Mastracci, MBA,  is president and portfolio manager for Vancouver-based KCM Wealth Management Inc., specializing in designing and stewarding retirement portfolios

Are your investing goals different after the U.S. election?

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depositphotos_114479008_s-2015
President Elect Donald Trump

We’ve been doing a lot of reading leading up to and since the election: as you’d expect there is no shortage of opinions of what is going to happen to financial markets and how investors should position themselves as a result.

The investing opinions vary as extremely as the political views.  We’ve read crazy things and some very sensible things.  Perhaps the best articulation of how to approach this was written by Ron Lieber  in the New York Times on Wednesday when he asked, “Are your goals different now?”

“Once upon a time — like, say, last week — you had an investing plan that was based on goals that may come years or decades from now. Perhaps you’re hoping to buy your first home. Maybe you’re trying to save enough to send a couple of children to college. You hope to retire by age 67.

Has any of that changed? If it hasn’t yet, then it’s not clear why your investments should.”  – Ron Lieber, New York Times

Big events happen and market volatility sometimes accompanies. That doesn’t mean you should try to guess the market’s reaction. As Lieber hints, changing your investment strategy to either protect you or try to take advantage of market volatility can be a sucker’s game.  At best you’ll get lucky: at worst you’ll fall victim to many of the psychological pitfalls that leave most investors, both individual and institutional, chasing the market to the detriment of their investment performance. Speculating and investing are very different things. You are an investor and investing successfully is a long term game.

So what should you do?

1.) Ignore the noise

Continue Reading…