Are they part of a growing trend that is here to stay?

One of the big trends today is a focus on lowering investment volatility. As your advisor, I like keeping you informed about financial service industry trends, especially ones that could impact you.

Following the financial crisis of 2008 and 2009, when most stocks worldwide experienced sharp declines, investors began focusing on a specific type of product: low volatility. Before we explore low volatility, let’s consider what volatility is. In investing, volatility measures the price swings of securities like stocks, bonds, currencies, commodities, etc. If something is highly volatile, that means its price fluctuates significantly. 

You may find high volatility hard to handle because it’s tough to watch your investments decline in value. It takes time to recover losses, so losing money puts your financial goals in jeopardy. For example, if a stock lost 50% of its value (e.g., went from $8 a share to $4), it would need to gain 100% (i.e., double from $4 to $8) to break even. 

Markets have become increasingly volatile. Data from Bloomberg, a leading financial software and data company, shows that between 1985 and 1999, there were almost 800 days where the S&P 500 Index saw fluctuations of greater than 1%. From 2000 through 2015, that number jumped to over 1,200 -- a 50% increase.

To combat this high volatility trend, many investors are choosing low volatility mutual funds. Such funds use sophisticated strategies -- including alternative investments and derivative products like options, or buying securities with low volatility characteristics -- to minimize fund volatility. 

A low volatility fund can suit cautious investors because it lets them participate in “riskier” investments like stocks that tend to produce stronger long-term returns than bonds and guaranteed investment certificates. Low volatility products may also suit people in (or near) retirement who need steady income and can’t wait for declining markets to rebound.

When it comes to savings and investing goals, risk tolerance and time horizon, everyone is different. Low volatility products are great for some people but not ideal for others. That’s why it’s important for us to talk about your unique situation and find appropriate products.