DIY Investor Magazine
/
2015 Issue
25
WILL THIS BE THE YEAR
OF VOLATILITY?
There are reasons to believe that the equity price
swings experienced in early trading of 2015 could
well be a feature of the year ahead.
The oil price, Eurozone woes and shaky news
from China have all conspired to deliver a roller-
coaster ride across the major stock exchanges.
It is uncertainty that drives volatility and whether
it is in the shape of the General Election in May,
a potential Russian default or the deflationary
risk posed in Europe and possibly China, there’s
plenty more of that on the horizon. For those with
a strong stomach, time and acumen, volatility can
be a welcome phenomenon. For the rest of us it is
about adjusting investment strategies to cope with
the changing environment.
The FTSE 100, which has put in its worst start
to a year since 2008 (the year of the global
financial crisis) has seen dramatic sell-off and
rebound already. On closing figures alone it has
travelled from trough to peak of more than 200
points during just two days 6-8 January. One can
also illustrate the change in market conditions
by looking across the Atlantic at the US S&P
500 index which hit an all-time high last year.
Throughout 2013 and 2014 the average trading
range was in the region of 15 points. In the weeks
which took us from 2014 into this year, that jumped
to some 25 points.
For active traders, spikes in volatility present
opportunity as well as risk. Taking advantage of
more sophisticated products such as Covered
Warrants or Turbos means that it is possible to
profit from both strengthening and declining
markets. For those with successful strategies,
profits can be magnified.
But while these are limited liability products, they
are higher risk and traders can lose all they have
invested.
Another multifarious group who sometimes
welcome volatility are the so-called ‘contrarians’.
These are not, as is sometimes thought,
investors who simply do the opposite of the
market but rather make up their minds on the
fundamental merits of an investment irrespective
of the crowd.
FOR LONGER-TERM INVESTORS WHO
HAVE THE LUXURY OF TIME TO WAIT FOR
VOLATILITY TO WORK ITSELF OUT, THE
OLD ADAGE OF BUYING QUALITY INTO A
FALLING MARKET SURELY APPLIES.
As such, volatility means that there could be
opportunities to buy specific sectors on general
weakness.
For longer-term investors who have the luxury
of time to wait for volatility to work itself out, the
old adage of buying quality into a falling market
surely applies.
In conditions like this, investment timing can
present an unwelcome risk and one way of
addressing it is to drip-feed funds into a chosen
market or product by way of a regular investment
scheme.
