For many women volatility in the markets is like wearing a strapless bra. You cannot wait for the instability to stop and you cannot wait to take off your strapless bra. We all have our threshold for wearing a strapless bra, whether it is only for an hour long date or for an entire wedding. You need to know how long you can wear a strapless bra and still be comfortable (if that is possible). The same goes for volatility in the markets and measuring what your risk tolerance is for that volatility.
Before you start investing, you might want to think about what your pain threshold or risk tolerance is. If you can’t sleep at night because you are so uncomfortable with your investments, you might be taking on too much risk. Some people don’t want to see their portfolio go down by more than 5 or 10 percent while others are fine with a 20 percent drop in their investment accounts. I like to revisit my client’s risk tolerance at least once a year because it tends to change with market cycles or with life cycles. If you lose your job or your circumstances change in some way, you probably will change your risk tolerance as well.
Sometimes it is worth it to wear a strapless bra for that perfect dress for a wedding or a date. The same can be said for market pullbacks. During volatile times in the markets, within a day, the market can go down or up by two percent or more. From January 1st of this year to March 17th, about a third of market days had two percent or more of up or down days. And after March 17th, about a third of the trading days saw one percent up days or down days. You can see if you’re in a market cycle like we are in with a lot of pullbacks and rallies in the markets from day to day, it is hard to know when to sell and get out. As investors, we tend to get emotional and sell at the wrong times or at the stock market lows and buy when the markets are at a high.
It can be a good thing to know how much volatility you can take as an investor and build a portfolio around this. You may not want to take on more risk than you can stomach. How do you know how risky or volatile an investment is? You can look at its standard deviation and see how high or low it goes from its mean. Another stat to look at is the beta of an investment. What does a beta measure? Beta is like finding out which type of strapless bra you need, one with a pushup, one with clear straps for extra support, or one with no back. It is actually there to measure a stock or bond’s volatility, and how much it will change with the market’s movement. A beta of 1 means it will move the same amount as the overall market. If it has a beta of .5, it will move half as much. It can also be negative, so a beta of -.5 says the investment will move half as much and in the opposite direction of the market. These are two stats you can find on most investments that will give you some direction to how much movement, up or down, you can expect. Of course, past performance doesn’t guarantee future results or an investments movement.
Before you wear your strapless bra, think about how long you can wear it for or put up with it. And before you invest, you might want to think about your risk tolerance or how much pain you can put up with and still feel comfortable. It can also be beneficial to review your risk tolerance as your situation changes or as the markets become more volatile.
Jessica Weaver, CFP®, CDFA™, CFS®
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Jessica Weaver and not necessarily those of Raymond James.
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