Current market environment performance of dynamic, risk-managed investment solutions.
By Jerry Wagner
Extreme weather can take many forms—powerful storms, earthquakes, tornadoes. One moment, stability seems certain; the next, nature reminds us of its unpredictability.
Record low temperatures can be followed by unseasonably warm days. Droughts may give way to wildfires that set the stage for mudslides. Weather patterns shift unpredictably, making it difficult to know what’s coming next.
It seems that it is no different in the financial markets. Stock market extremes are legendary. Its price history has been compared to the ups and downs of a roller coaster.
In fact, stocks tend to experience extremes to the upside more than to the downside. Part of the reason is simple mathematics: Stocks can’t fall more than 100%, but there’s no limit to how much they can rise.
But just as a nonswimmer can drown in a river that averages just four feet of water if the deepest stretches are eight feet in depth, stock investors can lose money in the market when they buy in when the price is high and volatility is shallow.
Understanding market extremes
The consequences of an extreme move in stocks to the upside can be pleasant, like an early thaw in winter. We certainly have experienced that kind of stock market weather many times before. But when stocks fall to the extreme, it can be as devastating as being caught in a storm surge in the middle of a hurricane.
But have you noticed that when we are caught up in life, it’s often difficult to determine if we are dealing with an extreme event or just a blip on life’s radar screen? How many times have you heard of stores emptied of their water bottles and canned food in anticipation of a major storm only to have the projected tempest fade into minor showers?
In the market, you can tactically retreat whenever the market does so, or you can sit still and ride it out. Each type of response has been rewarded over financial history. And each approach has been punished.
Navigating volatility with a balanced approach
Quantitative risk management, the basis of the approach we take at Flexible Plan Investments (FPI), attempts to take a middle ground. It uses market and economic history to put what’s happening now into a historical perspective. It attempts to assign probabilities to different types of events and only takes action when probabilities are high enough that the risk of staying in exceeds the opportunities.
Prepare your portfolio for any market climate
Just as preparing for unpredictable weather can help minimize its impact, ensuring your portfolio is equipped to handle market volatility is essential. A diversified, dynamically risk-managed approach can help reduce unnecessary risks while positioning for opportunities.
FPI’s investment strategies are designed to navigate changing market conditions and keep your financial goals on track. If you’re unsure about whether your portfolio is built to withstand market storms, talk to your financial adviser or explore our website to learn more about how dynamic risk management can help you stay prepared.