Volatility Is Costing You More Than You Think

Volatility Is Costing You More Than You Think

Brendan Greenwood CFP, CIM, B.Comm | April 23, 2024

The VIX, measures the stock market's (S&P 500) expectation of volatility over the next 30 days. It's often called the "fear gauge" because it reflects how much investors expect the S&P 500 Index to fluctuate.  If there’s one thing that has been consistent over the past couple months, it’s the increased volatility in the stock market.

Notable drivers:

• Trump’s changing trade policies

• Elevated asset prices

• Size of budget and trade deficits

have all contributed to the stock market’s turbulence.

Volatility is bad for investment portfolios.  It eats into your returns and hurts long-term growth.  Reducing volatility in your investment portfolio which I describe as a constant risk strategy creates greater long-term growth potential.

Below is an illustration of the difference between a portfolio that employs a constant risk strategy by reducing portfolio volatility to a more volatile portfolio that simulates the highs and lows of a traditional equity portfolio.

After 10 years:

• Constant Risk strategy ends with $206,103

• Volatile strategy ends with $176,402

That’s a difference of $29,701 less in the volatile portfolio—even though its average return might seem competitive. This is the real cost of volatility drag over time.

A Constant Risk Strategy has been adopted by large institutional pension fund investors to protect and enhance returns. A targeted risk level is maintained by reducing exposure to riskier assets when markets are threatening (highly volatile) and increasing exposure to riskier assets when volatility is low.  The current elevated uncertainty means portfolios should have increased exposure to assets that are less correlated with the stock market or that can provide return potential independent of the stock market.  Some assets to consider may include market neutral, long short or options funds, precious metals, North American and International bonds. 

Controlling risk is becoming even more important in today’s markets. A good advisor can help you effectively deploy a constant risk strategy to avoid harmful volatility drag and increase the likelihood of greater long-term return potential in your investment portfolio. 

Brendan Greenwood is an Investment Advisor and Financial Planner with Worldsource Securities Inc. focused on improving the lives of his clients and their families through holistic planning. He specializes in tax advantaged personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionals, business owners, retirees and their families.

For other articles written by Brendan Greenwood visit his Blog | GreenwoodWealth

Book a discovery meeting with Brendan here: https://calendly.com/greenwoodwealth  to see if we can help.

*Insurance solutions and related services mentioned in this newsletter as part of comprehensive financial planning services only and are not available through Worldsource Securities Inc. Investments products and services are provided by Brendan Greenwood through Worldsource Securities Inc., sponsoring investment dealer and a Member of the Canadian Investor Protection Fund (CIPF) and of the Canadian Investment Regulatory Organization (CIRO).

Investing involves risk. Equity markets are volatile and will increase and decrease in response to economic, political, regulatory and other developments. The risks and potential rewards are usually greater for small companies and companies located in emerging markets. Bond markets and fixed-income securities are sensitive to interest rate movements. Inflation, credit and default risks are all associated with fixed income securities. Diversification may not protect against market risk and loss of principal may result. Commissions, trailing commissions, management fees and expenses all may be associated with investing in exchange-traded funds (ETFs). Please read the relevant prospectus before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

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