There are many perspectives to market volatility that investors can research, monitor and learn about. Some of these forms of volatility include actual historical volatility, actual future volatility, historical implied volatility, current implied volatility and future implied volatility. This can be very confusing so let’s look at the most commonly used in investing historic volatility for our discussion.
Volatility can be defined as the size and frequency of the fluctuation in the price of a particular stock, bond or commodity (source: Barron’s Business Guide, Fourth Edition, Jack Friedman). As investors, it’s important to have some understanding about volatility in the marketplace as well as how some investment classes have done in the past. Please keep in mind that past performance is no guarantee of future results. However, with research about a particular investment or asset class, it can help provide more understanding about the level of volatility within an investment.
When measuring volatility, investors may want to factor in a short-term or long-term analysis for their investment strategy. This is important and will vary per investor due to their investment time frame. For example, the Standard & Poor’s 500-stock index for the last 20 years has been able to earn just above nine percent return on average. Although, the five-year average for the S&P 500 stock-index is just below three percent. As we can see, the time frame of investing can impact one’s portfolio. So it’s important to consider the length of time for each investment — whether it’s a retirement account, a college savings plan or non-retirement money slotted for short-term use.
Another way that investors may try to reduce volatility in their portfolios is to invest in different asset classes. This way the investments are not limited to one area or sector of the markets. Also, by having a combination of different investment strategies in different classes, it may limit some potential volatility. It is important to know that using diversification as a part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss in declining markets.
Investors typically have assets for different purposes, like retirement, kid’s education or personal saving. So having a strategy for each of them and factoring in the amount of volatility that is comfortable should be a consideration. In many cases, working with a financial profession can assist investors with this, and I also highly recommend reviewing the investments and strategies on a consistent basis.
For more information about market volatility, visit jacobgold.com.
Securities and investment advisory services offered through ING Financial Partners, Inc. Member SIPC. Jacob Gold & Associates, Inc. is not a subsidiary of nor controlled by ING Financial Partners, Inc. This information was prepared by Michael Cochell of Jacob Gold & Associates, Inc. and is for educational information only. The opinions/views expressed within are that of Michael Cochell of Jacob Gold & Associates Inc. and do not necessarily reflect those of ING Financial Partners or its representatives. In addition, they are not intended to provide specific advice or recommendations for any individual. Neither ING Financial Partners nor its representatives provide tax or legal advice. You should consult with your financial professional, attorney, accountant or tax advisor regarding your individual situation prior to making any investment decisions.