Investment Strategies for the "New Normal" in Volatility
Posted on Fri, Nov 04, 2011
The first 220 trading days of 2011 have provided some of the most volatile market conditions in the past 50+ years. In fact, half of the trading days since the beginning of August have seen a market move of greater than +/-1%. So what’s the result of this extreme market volatility? What have traders and investors received in return for suffering through this market whiplash? Year to date the market is nearly unchanged (down slightly as of 11/4/11). That was a long painful ride to get nowhere.
As self-directed investors should we continue to expect this “new normal” of extreme volatility to continue? The answer is; it doesn’t really matter. It’s easy to get euphoric when IPOs like Zillow and Linkedin sky rocket in their first day trading. It’s easy to panic when a rating agency downgrades the debt of the US government. What’s difficult as a self-directed investor is sticking with the rules of your strategy.
Great stock investing strategies perform well in volatile and stable markets. Take for example a simple strategy that selects the 20 highest dividend yielding stocks with a cash ratio above 20% and a stock price above $20. In 2008 this strategy outperformed the market by 11.6%. Equally impressive is that this strategy outperformed the market in both 2009 and 2010 by an average of 10%. Those three years provided investors with extreme selloffs and widespread rallies, only the best strategies could beat the market through it all.
Long-only equity investors know that it’s unrealistic to expect to avoid volatility completely. So why not embrace it? With a solid strategy investors can easily weather the selloffs and consistently outperform during the rallies.
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