2020: a year of very high volatility.
Good morning community,
we entered the last quarter of this 2020, which turned out to be a very special year. We have had extremely high volatility that has been the unconditional queen of the markets.
To invest in the markets, we had to have nerves, discipline and above all, avoid panic. Fortunately, having a united group, and trading together with other professionals, made the task easier for us by making us stronger in difficult times.
In the first quarter of the year, the S&P500 stock and benchmark index gave up about 30 percent at the worst time, and many investors, gripped by fear, unfortunately liquidated all positions. Today whoever decided to sell will be eating their hands given the record-breaking recovery that has taken place in recent months.
This very high volatility has increased doubts, fears, and skepticism around the stock world, and the reason for this is called volatility indeed!
According to a survey conducted by the Flossbach von Storch Research Institute in Cologne, German private investors consider price fluctuations to be one of the greatest risks to theirassets.
Not only them, but also many professionals in the field found themselves displaced by this abnormal year being used to a much slower pace than today.
Volatility is now part of the moment, and we must get used to making the best use of it. In our view, with the U.S. election just around the corner and the current situation still uncertain, the markets will by no means be quiet in their movements.
But why is there such fear?
Hearing the word volatility, many people’s mental approach leads them to think of a crash in the markets. Almost no one sees it as an opportunity, as in the case of the stock market recovery, and very few try to take advantage of it by trading to the upside.
There is always the notion that the higher the vix index, the more the markets are in danger of crashing. Well, that’s not really the case: the vix always tends to arrive later than the indexes’ declines.
Just before the Coronavirus crisis broke out, on Feb. 20, the VIX hit a low of 16 points, only to rise again to a high of 83 points on March 17 and fall back since then to about 27 points (late September update).
Looking at a 10-year graph, the pattern looks very similar to that of the 2008/2009 financial crisis. In both cases, volatility increased only after prices had collapsed.
In assessing the risks associated with market volatility, the time horizon plays a key role.
In essence, volatility is great for scalping in the short term (as we teach in our courses) and remains an excellent ally for the long term.
For those who can afford to wait a few years, temporary price fluctuations offer an opportunity to enter the market on better terms and even improve the carrying price of an individual security.
For those who invest their assets for the long term, they can forget about volatility, which often only confuses them.
We have to come to terms with our risk appetite, patience, and the technical knowledge we have that underlies an investment.
Investors tend to react unaggressively if a crisis involves the stocks of companies with reasonable earnings prospects. A strong balance sheet and effective portfolio management often make it possible to overcome negative periods and difficulties, leaving us unscathed.
Always remember that the percentage of stocks in the portfolio should be very carefully analyzed and investments allocated to different market asset classes to reduce risk.
Only in this way, even in difficult times, can we expect the quality of investment fundamentals to translate back into higher prices.