Volatility is the measure of the standard deviation or variance of returns of the market or individual security. Simply put, it gauges the overall risk of the market. If volatility is high, then the market is considered to be a riskier place to be invested. We have had historically low volatility for some time now, but this could change come October. There are a couple of reasons I see this happening.
One, we are in an election year. If you go back and look at the last 6 election years, the volatility index or VIX has risen every time. The odds of it happening again this election cycle are pretty good. Election years tend to cause volatility to rise because markets do not like uncertainty. This election may be the most uncertain and controversial we have seen in my lifetime.
Two, the Federal Reserve really has no idea what they are doing. Interest rates are at all-time lows. At some point, Fed policy will need to change toward a tightening policy versus easing. As the Fed moves toward a policy of raising rates versus lowering, money will not be as accessible and this will have a direct effect on the markets.
As an investor, what does this really mean? It means that you should prepare your portfolio and your mindset to the fact that the market may have some extreme moves based on the news that comes out and the potential outcome of the coming election. First of all, do not panic and go out and liquidate your portfolio. This is a good time to raise some cash and wait for opportunities to present themselves. An increase in volatility can be a great time to upgrade your portfolio. Sell off your losers and reinvest in quality companies should they become oversold and present an opportunity. Second, take a deep breath and reassess your risk tolerance and primary objective. If you are younger and investing for retirement, there is no need to do anything rash. If you are older and in retirement, you may want to raise some cash to whether the potential market turbulence. I would recommend anywhere from 10 to 20 percent as a cash position depending on your level of risk tolerance.
My advice is to make a list of securities you would like to own. Then wait and see how things play out. If the market does become volatile, there is a good chance that the company you have wanted to invest in will get sold off to a point that makes it an attractive investment opportunity. If the market does not become volatile, you really don’t lose anything and you made your portfolio a little safer and you probably won’t panic and make a rash decision.
As always, the opinions expressed in this article are that of the authors. If you would like to discuss this topic further, please call Fogel Capital Management at (772) 223-9686 .