It's no secret that the financial markets in recent years are more volatile on a daily basis than we were used to before the financial crisis of 2008. A recent study by the New York Times found that since the beginning of 2010, 30 percent of all trading days for the New York Stock Exchange saw daily moves up or down of greater than 1 percent. During the decade of the 1990s, only 20 percent of trading days experienced changes of that magnitude.
Moves of 1 percent per day may almost be considered tame by recent standards where daily changes of 3 to 4 percent have become frequent. My last article highlighted the week of Aug. 8, where the first four days of the week saw alternating daily changes down and up of greater than 4 percent.
The source of the volatility is the subject of some debate, and the Securities and Exchange Commission is currently studying the subject of volatility to see if any regulatory action should be taken. Some attribute the wild swings to what are known as high frequency traders, who are generally large professional investors who use automatic trading programs to constantly buy and sell shares of stocks to make very small profits measured typically in pennies. Make enough trades with enough volume and those pennies start to add up. This activity has been made possible through the technology advances in processing trades at very high rates of speed.
Some attribute the volatility in the last several years to the general level of nervousness investors are living in today with doubts about the fiscal stability of several governments, particularly in Europe, and the generally high level of debt maintained by most governments in the developed economies of the world.
Whatever the reason, today's investor has choices to make in the present environment. Some choose not to participate and have left the arena of stocks, bonds and related securities for the safety of money market funds and CDs. By recent measures, over $8 trillion of investors' capital is sitting in these very safe but low yielding investments. There is another $3 trillion or so of cash owned by corporations also earning effectively zero and waiting to be deployed when confidence or opportunities present themselves.
The sometimes wild weekly swings in stock prices, REIT values and even bond prices don't have to be a deterrent to the investor who is willing to view the net impact of the activity over slightly longer time frames. In other words, reacting to the big down day on Monday, Aug. 8, was a waste of time by the end of Tuesday, Aug. 9.
Of course, my saying you shouldn't react to the more emotional swings in the market doesn't make it easier to actually do it in the heat of battle. That's why having a plan on how to deal with the market price swings is so important. There are many different methods and techniques ranging from diversification to market timing to buy and hold. Any of the methods can and will work well if you stick to a disciplined approach in applying the process.
Changing techniques to what would have worked best over the last year start a continual process of changing strategies, which is destined to always be late, and buying into trends, which are due to end soon. As I stated in my last article a couple weeks ago, having a plan to manage your way through volatile periods is the key to your portfolio's success.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.