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| Source: marketintelligencecenter.com |
Volatility in the investment world attempts
to measure the stability or susceptibility of your investment to sudden changes
in value. These sudden changes cut both ways.
Volatility can cause the value of an
investment to rise precipitously or fall dramatically in a very short period of
time. We have all seen a bad news story immediately tank the value of a
property or company in a matter of minutes.
A look back at the performance of investment categories in general is a good lesson on volatility. Some sectors of the investment world rose nicely in 2012 while others did not fair so well. And within the specific sectors or categories of investments, there were fantastic winners and some really big losers.
Large capitalization U. S. companies, often referred to as large cap companies are the largest companies in the USA. For some reason, investors like owning very large companies and have told me that they feel safe with these holdings. Upon investigation, rarely are these investors able to articulate why these holdings are in the portfolio, what type of returns or yield is expected, why they may consider holding onto the position or the criteria they may use for selling the position. Unfortunately, taxes and sentiment are frequently a part of the decision process; but usually in a way that prevents the investor from acting rationally.
According to a listing of the best and worst investments of 2012 compiled by Bloomberg, there was quite a range. Of 358 stocks with market capitalizations of greater than $10 billion, the range was from plus 219 percent to a low of minus 49 percent. I suppose that would be good if you were an owner of the company that appreciated by 219 percent, but it would be pitiful if you were an owner of the one that lost 49 percent. Unfortunately for many, the company that depreciated by 49 percent last year is a household name for many owners and followers of large cap U. S. stocks.
Managing volatility is gaining more significance in the portfolios of once passive buy and hold investors. Recent memories of large losses and investors approaching retirement age are leading this desire to manage volatility. Unlike institutions who can sustain sudden drops in value, individuals, especially those nearing retirement cannot. The institution can either add new funds to their investment portfolio or push back their time horizon for achieving a particular financial goal. Individuals cannot either add more money or push back their timelines.
Diversification, although definitely not a guarantee of positive investment returns is one way that investors may limit volatility. Your diversity needs to go farther than a few U. S. asset classes, and could include classes like foreign debt, real estate, commodities or currencies. Having a disciplined sell strategy may be another component in your quest to limit losses and volatility.
This is different than your father’s large cap buy and hold strategy, but this is a different world that may require new ways of managing risk.
A look back at the performance of investment categories in general is a good lesson on volatility. Some sectors of the investment world rose nicely in 2012 while others did not fair so well. And within the specific sectors or categories of investments, there were fantastic winners and some really big losers.
Large capitalization U. S. companies, often referred to as large cap companies are the largest companies in the USA. For some reason, investors like owning very large companies and have told me that they feel safe with these holdings. Upon investigation, rarely are these investors able to articulate why these holdings are in the portfolio, what type of returns or yield is expected, why they may consider holding onto the position or the criteria they may use for selling the position. Unfortunately, taxes and sentiment are frequently a part of the decision process; but usually in a way that prevents the investor from acting rationally.
According to a listing of the best and worst investments of 2012 compiled by Bloomberg, there was quite a range. Of 358 stocks with market capitalizations of greater than $10 billion, the range was from plus 219 percent to a low of minus 49 percent. I suppose that would be good if you were an owner of the company that appreciated by 219 percent, but it would be pitiful if you were an owner of the one that lost 49 percent. Unfortunately for many, the company that depreciated by 49 percent last year is a household name for many owners and followers of large cap U. S. stocks.
Managing volatility is gaining more significance in the portfolios of once passive buy and hold investors. Recent memories of large losses and investors approaching retirement age are leading this desire to manage volatility. Unlike institutions who can sustain sudden drops in value, individuals, especially those nearing retirement cannot. The institution can either add new funds to their investment portfolio or push back their time horizon for achieving a particular financial goal. Individuals cannot either add more money or push back their timelines.
Diversification, although definitely not a guarantee of positive investment returns is one way that investors may limit volatility. Your diversity needs to go farther than a few U. S. asset classes, and could include classes like foreign debt, real estate, commodities or currencies. Having a disciplined sell strategy may be another component in your quest to limit losses and volatility.
This is different than your father’s large cap buy and hold strategy, but this is a different world that may require new ways of managing risk.
John P. Napolitano is CEO of U.S. Wealth Management in
Braintree, Mass., and 2012 president of the Financial Planning Association of
Massachusetts. He may be reached at jnap@uswealthcompanies.com
or on Facebook as JohnPNapolitano and US Wealth
John Napolitano is a registered principal
with and securities offered through LPL Financial. Member FINRA/SIPC. He can be
reached at 781-849-9200.
Securities offered through LPL Financial, Member FINRA/SIPC.
Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.
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Securities offered through LPL Financial, Member FINRA/SIPC.
Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.
The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.
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