Volatility Management: The Key to Investing in the 21st Century

Volatility Management is the most important consideration in our portfolio management process. In some market environments, we think investors are well-compensated for the risks they take. In others, they are not. Thus, volatility can be either a warning sign or a gateway to outstanding opportunities. It is part of an investment manager’s job to decipher that for you, on an ongoing basis, and make rational decisions.

Volatility management is about assessing three things very carefully, and adjusting as needed:

  1. The volatility tolerance of the investor – via discussion and a formal, written survey which aims to unearth the investor’s true concerns about how their portfolio will fluctuate.
  2. Matching that client to a strategy or mix of strategies, each of which has a target level of volatility which is flexible based on the manager’s view of potential gains versus potential for large losses in the near-term, intermediate-term and long-term.
  3. Regularly assessing both the expected volatility of each holding in the portfolio and the impact of any contemplated changes in the portfolio’s mix of holdings.

Volatility management is not easy and it is not a part-time job. But without it, investors are taking on much more risk of major loss or other disappointment than they may realize. After all, what in life that is really worth having is effortless to achieve?

© Sungarden Investment Management


Read more commentaries by Sungarden Investment Research