THUR 09 DEC, 2021-theGBJournal- An old saying about investing goes like this: “Stocks take the stairs up, but the elevator down.” Those of who have been investing for a while have experienced this firsthand. We have enjoyed a steady climb in stock prices over the past year and a half. Unfortunately, some of our stocks have decided to get on the elevator. Instead of continuing to rise, someone pushed the down button, and we have lost some ground. For some stocks —such as DocuSign— it seems like the elevator malfunctioned and went into a free fall.
Volatility like this can be tough to stomach. There is a temptation to want to sell and stop the bleeding.
However, while volatility can be difficult, it is normal, especially for many companies that we select. We often seek higher-upside opportunities, which causes more volatility.
What We have Learned
The good news is that there are ways to help blunt the impact of volatility. Four sources drive the overall volatility of our selections:
Stock-specific effects are the leading source of volatility. We recently saw that with DocuSign, which tumbled more than 40% in a day after issuing weak fourth-quarter guidance. While this source causes the most volatility, it is the easiest to protect against. If you own at least 25 stocks and hold them for at least five years, that diversification will help smooth out the stock-specific sources of volatility.
Market volatility is the risk we take for investing in the stock market —it is the cost of admission. The best way to manage this risk is to hold some cash. That can help cushion the blow of volatility and lets us take advantage of buying opportunities that will likely arise.
Industries are typically the largest drivers of risk within the stock market. Stocks in the same industry usually share common sources of risk. For example, airline stocks tend to hit turbulence when jet fuel prices rise. The best way to lessen this risk is by holding stocks across industries that offer offsetting risk profiles.
Investing styles are also a source of volatility. A shift in investor preference can cause one style to lose favor to another. For example, investors might rotate from growth to value stocks or shift from small- to large-cap stocks. Recently, we have seen some of this as investors have sold off high-flying growth stocks. We can also offset some style-sourced volatility through targeted diversification.
We generally build portfolios with shares of at least 25 companies and hold them for at least 5 years. Diversification can play a vital role in helping mitigate the sting of volatility.
Keep Calm, Have a Chat With Us and Explore The Opportunities
We do not want the volatility we have experienced in the past weeks to discourage you from continuing to invest. If anything, this jolting experience is an excellent reason to take stock and make sure you have a diversified portfolio. Finally, we wanted to leave you with another old saying from the financial markets: “Stocks always go down faster than they go up, but they always go up more than they go down.”
To organise a call, please call me Rebecca on WhatsApp +41 79 789 5313 or send me an email to schedule a call with both Pascal and myself.
Rebecca Ellis is a Personal investment advisor, based in Zurich rebecca.ellis@pomonawealth.com|pascal.crepin@pomonawealth.com
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