If you don’t like market volatility, you’re not the only one. We manage our clients’ investments and we are also investors in the same portfolios, so we feel the same pain. It is not pleasant when our portfolio values decline. However, portfolio managers who are trained and have seen various episodes of market volatility can handle it with more conviction than those who are not trained. In this month’s commentary, we will explain how to manage volatility.
Many investors say they do not like volatility. Oddly enough, they do not complain when their portfolio value is rising – which is still volatility, but on the upside. Realistically, what investors do not like is downside volatility. Avoiding downside volatility can be achieved by holding money in cash – it earns no interest at the bank, but the value does not go down. The challenge is that the purchasing power of our money declines as a result of inflation. While the overall Canadian inflation rate is less than 2%, your personalized rate of inflation may differ, depending on your shopping basket. For example, meat prices have been rising at an average rate of 5.1% over the last three years. Most of us, unfortunately, did not earn 5% interest from our cash savings, nor has our salary grown by 5% to offset the increasing cost of living. While our $100 bill still says $100, we are only getting 85% of the meat we used to get three years ago with that same $100 bill. If you buy an abundance of audio and video equipment, such as a big-screen TV, Blu-ray player, etc., the good news is that the cost has been deflating at 6% per year over the last three years. However, most of us need to invest our money to counter inflation and, therefore, we have to live with some volatility.