“Everyone has the brain power to make money in stocks. Not everyone has the stomach,” once observed legendary fund manager Peter Lynch. His point was that most people don’t have the stomach – or emotional stamina – for sticking to an investment plan when market conditions get choppy.
What makes 2018 remarkably different from the recent past is rising stock market volatility. Since the start of the year, the CBOE Volatility Index (^VIX) has shot higher by around 100% and at one point was up almost +250%. By comparison, this is the same crazy VIX index that was -42.5% for the three-year period from January 2015 to December 2017. How sharp has the reversal in stock market volatility from down to up been? During the first two months of 2018 alone, the VIX erased three-years of calm.
While rising volatility might put certain people on edge, it’s not necessarily bad. After all, if a fearless stock market is a dangerous place to invest, then the opposite equally applies – a fearful market is a much safer place than it may seem at the time.
Let’s examine three strategies for managing market volatility.
Avoid Volatility
The easiest way to avoid stock market volatility is to put 100% of your money in assets with minimal to zero volatility. One example of this might be putting your money into a bank savings account with a low yield but with decent liquidity and some level of principal protection.
Another example would be to keep your money stored in a private vault or hidden underneath the proverbial “mattress.” While both choices may limit market volatility, they aren’t without risk. Vaults can be breached and mattresses can burn to the ground if the house catches fire. Also, the threat of inflation – especially over long periods of time – erodes the buying power of un-invested money.
Although the short-term benefits for avoiding market volatility might seem like a good idea, there are serious long-term risks and side-effects.
Hedge Volatility
Instead of boycotting the stock market altogether, some investors decide to participate but to hedge the ups and downs.
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