Keep it simple.

As a portfolio manager who utilizes volatility in a portfolio for clients, I am a very optimistic manager.  Fear mongers out there will tell you the market is going to zero, sell everything only own VIX or Gold.  There is a non-zero percent chance that aliens land and destroy civilization, or World War 3 starts and collapses the modern world, or the next variant of covid turns the world into the zombie apocalypse.  If any of those possibilities happens, my investments will be the least of my worries.

A more realistic approach, and a better way to use volatility, is keeping it simple with two observations…

  1. Over time the market will go higher.

  2. When the market falls, it is an opportunity to buy.

Plenty of advisors stick with the plan of buy and hold.  It is better than buy and panic that is for sure.  Additionally, it is important to have a diversified portfolio to allow you to take advantage of number two by rebalancing in the teeth of a correction.

Stocks will go up over time.  Technology continues to improve at a faster rate.  However, built into the speed of technologies is uncertainty.  The world is more connected now, and there are more and more reasons for uncertainty.  So, while the market is going higher, there will be significant periods of volatility.  Investors need to know there is the risk of volatility, and the longer they invest, the more probable they will experience it.  A diversified plan now includes holding volatility, so advisors can…

  1. Keep losses to a minimum

  2. Reallocate to buy equities lower

Volatility in a portfolio

Everyone knows when the stock market goes down the VIX goes up.  Specifically bear markets are all associated with an immense rise in VIX.  Some people use the VIX as an indicator of market sentiment.  However, increasingly advisors are using this as a tool to turn the tables around and use the price correction to client’s advantage.  Long volatility strategies afford investors the opportunity to take profits in volatility and buy back stock at lower prices.

EAVOL allows equity armor to buy and hold volatility in the form of VIX futures contracts which allows us to be patient and wait for the next rise in volatility.  When the inevitable happens, Equity Armor can rebalance by buying stocks back at a lower price.  Volatility in a portfolio can lower the downside, and when managed effectively, has a built in buy low sell high strategy for equities.

To fit into a portfolio really depends on the strategy you employ and the risk your client has.  Hedged equities make sense for any client who wants capital appreciation and reduced risk.  Hedged equity can be a total core position.  It can be an alternative sleeve, and it can be an alternative to fixed income investing.

Bonds do not offer equity protection when interest rates are low

Historically, economic data has driven both asset classes in opposite directions.  A strong economy is good for stocks, but it also means interest rates will go higher.  A weak economy is bad for stocks but means interest rates will go lower.  Today asset prices are at all time highs.  The fed funds rate is at an all time low.  Finally, long term rates are still at historically low levels.   This is a recipe for disappointment for the 60-40 crowd.

Rethinking the 60-40 approach with volatility in your portfolio

In the pandemic economic environment, a 60-40 portfolio is just as risky as an equity only portfolio.  Bonds have been moving with growth and not providing any meaningful hedge.  A strong advisor will have an alternative sleeve carved out for this very reason.  Increasingly, researchers and advisors looking for volatility in a portfolio.  They are getting their clients off the roller coaster of investing and finding money managers who can deploy effectively a volatility based strategy to achieve long term appreciation with a focus on the path you get there.