Uncertainty
I am often asked what drives market volatility. The temptation is to look to the nearest headline about the economy, war, etc., but the real core reason is much simpler. Markets are volatile when buyers and sellers are both confused and concerned. We believe uncertainty is what drives market volatility.
Market volatility has become so prevalent that commonly used measures such as the VIX index seem to be somewhat antiquated. While it does provide an additional helpful data point, we believe it is not a reliable indicator of future market movements. Instead, it is now an indication of what has or is occurring; and that really doesn’t help much does it?
Because markets are so volatile, market timers and those that try to guess which direction prices will move on the short term are at a significant disadvantage. With the advent of supercomputers placing millions of trades a minute, the day trader stands little chance of winning this game.
It is our view that the only solution for market volatility is to position portfolios on the assumption that volatility will occur. Additionally, it is important to stress test portfolios to make a determination if the volatility
indicated by modeling is within sufficient ranges. This requires an analysis of each position as well as allocations to correctly construct a portfolio that seeks to provide the best possible return while still combating market volatility.
This describes a primary function of DWM as an investment manager. We do our best to try to anticipate difficult times that may lay ahead, and construct portfolios designed to help allocations weather the storm.
Also, an important part of investment planning is financial planning as it connects your portfolio with your overall financial goals. As a firm with 15+ CERTIFIED FINANCIAL PLANNER™ professionals, we believe that a financial plan is the foundation of the right investment plan. Remember, DWM clients are eligible for complementary financial planning services. Let us know how we can help.
Expect continued volatility. The headlines will be driven by elections, energy prices, debt, default, China’s slowdown, and a host of other perils. Remember, in the end, what we believe drives market volatility is the uncertainty regarding these events; not the events themselves.
