WOW! This year has been pretty rocky for the stock market from the start. Going back to last August, the market has experienced increased volatility not seen since the second half of 2011. The question is, were you ready?
For years, institutional investors and hedge funds have benefitted from drastic fluctuations in the market by being opportunistic during times like these. Even one of Warren Buffet’s classic rules is “Be fearful when others are greedy, and be greedy when others are fearful.”
Do these big money investors have information we don’t? I would say NO! Due to their experience and understanding of market fluctuations, these seasoned investors learned how to manage their emotions and focus on the fundamentals underlying the volatility.
Simply put, volatility is a measure of the roller coaster ride that individual stock and public markets go on when there is nervousness and unrest based on uncertain economic conditions.
During the financial crisis of 2008, we saw many investors flee their equity positions at substantial losses and move their assets to cash. The problem is that many stayed in cash for several years and completely missed out on the 6 year bull market that followed the crisis. What if they had placed a least a portion of this cash in opportunistic investments that rebounded when the market began to level out?
The key to benefiting from market volatility is preparation.
During times of relative calm in markets, it is important to begin to insulate your portfolio from the impending volatility that is sure to happen. It is possible to achieve this portfolio insulation through the use of non-correlated assets and cash.
It is also important to have a stash of cash on hand when volatility hits. The recent sell offs in public equity markets have created an opportunity to purchase quality stocks at drastically discounted prices. If you do not prepare for the eventual sale on quality stocks, then you might find yourself without enough purchasing power to make good on these name brand stock discounts.
With a proper allocation to non-correlated investments and a healthy portion of cash, many of our clients have been in a position to benefit from the recent market volatility. With more uncertainty on the road ahead, it’s not too late to begin insulating your own personal investment portfolio from future fluctuations.
Ask yourself, were you comfortable with your experience on your investments over the last couple of months. If not, it may be time to stress test your current portfolio and begin to hedge your bets.
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