Market Volatility Can Erode a Portfolio's Value
June 30, 2013 | Topics: Alternatives
- Market volatility has been on the rise
- In trying to avoid stock market volatility, many investors have missed opportunities
- Alternative investments can help to mitigate volatility in investor portfolios while providing attractive returns
Volatility is a measure of market risk based on the fluctuation of returns in response to external factors – both negative and positive. For instance, economic surprises, geopolitical events and even investor sentiment can cause sharp market movements either up or down. Volatility is typically represented by standard deviation, which measures the variance in the average returns of a specific market or investment over time. Less variance of returns means lower volatility and therefore lower risk.
Unfortunately, Volatility Is on the Rise
The past few years have seen increased volatility in the financial markets. For instance, average volatility (standard deviation) of the S&P 500 Index during the 1990s was 13.66% but increased to 17.81% since 2000.1
Investors Have Paid the Price in More Ways than One
Often, a byproduct of volatile markets is significant downturns, which require even larger recoveries. For instance, after a 40% decrease, an investor needs an investment to increase nearly 70% in order to return to where they started.
In addition, market volatility, similar to a roller-coaster ride, can cause extreme anxiety for many investors. When sentiment is low, emotions can drive investment decisions, which often result in underperformance. Frequently market sentiment is lowest when the opportunity is strongest. Rather than buying when markets are at their lowest and set to rebound, many investors buy at market highs and sell at market lows, causing underperformance in their portfolios.
Alternatives Can Provide Similar Returns with Less Volatility
Diversification can help "smooth" the ride and lessen portfolio volatility. By using additional sources such as alternatives, investors can decrease their reliance on traditional market returns and potentially lessen their overall portfolio risk. In general, alternatives rely less on broad market trends and more on the strength of each specific investment.
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1 As of 12/31/2012
The information on this Web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.
Incorporating alternative investments into a portfolio presents the opportunity for significant losses including in some cases, losses which exceed the principal amount invested. Also, some alternative investments have experienced periods of extreme volatility and in general, are not suitable for all investors.
Investing in alternative strategies such as a long/short strategy, presents the opportunity for losses which exceed the principal amount invested.
Hedge funds may not be suitable for all investors and often engage in speculative investment practices which increase investment risk; are highly illiquid; are not required to provide periodic prices or valuation; may not be subject to the same regulatory requirements as mutual funds; and often employ complex tax structures.
Utilizing private equity involves significant risks along with the opportunity for substantial losses.
Investors should consider the investment objectives, risks, charges and expenses of any fund carefully before investing. The funds' prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds by calling 800-882-0052. The prospectus and, if available, the summary prospectuses should be read carefully before investing.
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