Periods of market volatility are a test. It’s times like the present that tests confidence in how well investment strategies are constructed. Normal volatility requires that you have an iron clad stomach at the best of times, and an even stronger one during the present correction magnitude movements. The present investing environment is tense. How do you act during this period of heightened market volatility? Do you embrace it, investing opportunistically? Do you run from it, selling in panic or worse yet, thinking it’s too late to sell a downward sliding portfolio?  These periods test the level of your conviction in your investment choices. Choices that you’ve made in the past and still hold long. Based on the domination of the sell side over the past 12 months, it seems that many people are not convinced at all about their choices. Suggesting that many may have failed or be failing the volatility test.


Passing the Test

I think I deserve a “B” on this exam, stretching it, maybe a “B+”. The S&P started the year at 2043.94 then proceeded to drop 10%. In comparison my stock portfolio holdings dropped approximately 6%, beating the benchmark. So, I think a B+ is merited. I’ve passed the test largely because I’ve executed on the value investing principle of margin of safety. The margin of safety is a critical factor in my investment strategy that allows me a certain level of objectivity when all hell breaks loose in financial markets. With the built in margin of safety cushion, as a value investor buying low, permits me a certain level of peace when major price fluctuations hits the equity markets and portfolios.


What’s Going On? Investors Can’t Decide

The present period of uncertainty is global. The associated risks emanate from the world’s most important economies. The instabilities are spawned by many conflicting economic indicators: looming bond defaults, US industrial production numbers up 0.9% this month but down from last year, central banks policy divergence, Fed tightening (or loosening with a negative interest rate), WTI futures testing sub $30 limits, unemployment rate at 4.9% but jobs created are within retail and other lower wage areas, global growth forecasts being downgraded, the Chinese economy being on life support, European financials are a mess, etc… The list of good news/bad news goes on. Over the past 52 weeks, investors have responded to the conflicting indicators by pushing the S&P down 15.2% towards bear market territory. The market volatility index, the Vix, as well, has reacted with a wide 12 month range of 10.88 lows and a high of 53.29. As if to emphasis the point, spot gold is rebounding strongly off a milti-month low of $1196/ozt. Essentially, investors believe that the major economies may dip into a recession or…maybe not.


Conclusion: Prep for the Next Market Volatility Test

The silver lining to major market volatility is that it provides investing opportunities. The fact is that the markets have not had a sustained upward movement for well over one year. Recent gains, including this weeks’ 3 session 5.3% rally, still put the markets down for February. It is worth noting that the bounce has been on low volumes. With a focus on company fundamentals, I, for one, am checking markets to identify if any of the positions I’m interested to include in my stock portfolio have moved into my entry point target zone. All in line with my investment strategy. Purchases I make now will help me pass the next round of  tests.


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