PA ANALYSIS: Should wealth managers do more to take advantage of volatility?

Added 23rd February 2016

Volatility is a word that seems to have strongly negative connotations whether you are talking about markets or somebody’s personality.

PA ANALYSIS: Should wealth managers do more to take advantage of volatility?

When you are talking about investments however, there is an upside to volatility that seems to be all too often overlooked.

Market volatility manifests itself as changes in the prices of assets. For anybody to make any money investing, asset price must change so that cannot be a bad thing taking in isolation.

The problem is never volatility itself, but making the wrong decisions within that context, and losing money as a result.

The prevailing narrative around volatility is dominated by what wealth managers can do to mitigate against volatility and reduce risk. This is of course important, particularly for clients with shorter time horizons or high risk aversion for other reasons.

Having said that, and given there seems to be no sign to an end to the volatility, a bolder approach could yield much better returns that one focused on damage limitation.

"The start of 2016 has laid down this challenge to wealth managers and other investors like seldom seen before"

For example, moving more assets into long/short funds or even hedge funds is one way that investors can ride volatility to increase returns, provided the right funds are chosen.   

Another option worth consideration is more single stock investments when good opportunities present themselves. Of course this brings with it risk and requires a lot of work, but the rewards for the right trades whether long or short, could be significant and quickly realised.  

In the early weeks of 2016 we have had not only the FTSE seeing big rises and falls in one session but many of the stocks that comprise it, with swings of 5% or more not uncommon.

At the very least, it can be argued that some of these big sentiment driven falls are buying opportunities even if you are not adventurous enough to short expected fallers beforehand.    

The start of 2016 has laid down this challenge to wealth managers and other investors like seldom seen before.

According to AJ Bell, the FTSE 100 has had its most volatile start to a year in over two decades.

In the 36 trading days this year, the index has risen or fallen by more than 1% from open to close on 24 of them, as the chart here shows.

 

 

 

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superficially attractive

Very nicely put - the challenge of course being encapsulated in your phrases 'The problem is never volatility itself, but making the wrong decisions' and 'hedge funds [are] one way that can ride volatility to increase returns, provided the right funds are chosen'. Choosing the 'right' fund or stock is difficult as is making the 'right' decision, and most of the academic evidence suggests the difficulty and cost of being right outweighs the benefit over the long term (where it is even possible). Sadly, emotionally unsatisfying though it is the right option for most investors, and wealth managers is invest for the time horizon and risk budget you have and don't try to 'play' the markets.

Posted by: John Stirling, 24 Feb 2016

About Author

Alex Sebastian

News Editor

Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.

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