What you need to remember about how to invest in volatility
Volatility. For some investors, it is a term they never want to hear. For others, it simply means there is more planning and strategizing to get through it and potentially generate some significant returns.
Volatility is the measure of how prices and returns fluctuate over time for an asset. It is often used in the world of investing to refer to the volatility of the stock market, an index or an individual stock.
Volatility is scary for many investors because the uncertainty makes it hard to time trades or make profitable decisions. Often, it can lead to a loss.
However, periods of volatility are not always so bad. If you have a sound, long-term investing strategy, you should have the stability and flexibility to ride out the volatility. But, if you are planning to retire soon or withdraw your funds for some other reason, there are some points you should remember for getting the most out of your money during volatile times.
Understand the VIX
The Chicago Board Options Exchange Volatility Index (VIX) is an index that essentially tracks investor sentiment on volatility. It calculates a number based on investor sentiment, and the higher that number is, the more likely investors are expecting volatility.
The VIX primarily projects investor sentiment based on options trading in the S&P 500. If the majority of options placed are contingent on downward trends in the market, then the VIX may predict a volatile period on the horizon.
The VIX is a key indicator for investors on the sentiment of volatility, but depending on your personal investment strategy, you may have other indicators you need to consider, such as company announcements or product launches. This is why it is a good idea for many investors to work with a financial professional to create an investment strategy that takes periods of volatility into consideration.
Diversify your investments
One of the best ways to protect yourself from big losses during periods of volatility is to make sure you have a diverse portfolio. Your investments should include stocks, bonds and other assets across a variety of market sectors. This way, if one or two sectors are underperforming, the others that are still doing well can keep your portfolio afloat.
Talk to a ProVise CFP® professional about how to invest in volatility
At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about how to invest in volatility? Contact ProVise today to schedule a complimentary consultation.