Investors Caught in the Wild Winds of Volatility

• The Stock Market Is Wildly Gyrating
• Volatility May Be the New Normal
• Retail Investors Should Diversify

Mom and Pop investors should be prepared to see the value of their hard-earned retirement accounts continue to gyrate wildly in the days and weeks ahead.

“It was Wall Street’s worst day in more than a decade: Stocks plunged on Monday as a panic that began in the oil market made its way through the global financial system, adding to concerns from already rattled investors about the state of the global economy,” according to Monday’s New York Times, which posted the story after the stock market closed at 4:00.

“The S&P 500, already down 12 percent from its late February high, fell more than 7 percent on Monday,” the Times noted. “The sudden downdraft meant that trading in the United States was automatically halted early in the day — a rare occurrence meant to prevent stocks from crashing — but it resumed after a 15-minute delay. The Dow Jones industrial average fell 2,000 points.”

This is terrible. What are retail investors to make of all this?

For some, unfortunately, their brokers are telling them to jump into the market today and “buy the dip.”

Those brokers will then insist that their clients adapt to this new market and stay the course, whilst racking up massive commissions.

The best advice for retail investors to follow is investing 101 – diversification and asset allocation. Very rarely do all asset classes get whacked at once, so diversification is a simple, safe and practical strategy.

That’s why working with a financial adviser who creates a financial plan – the opposite of a stock jockey – is a better strategy for most investors.

The use of margin can also be a portfolio killer. Investors who saw huge gains from buying stocks with margin loans have learned the brutal lesson of the speed with which margin calls and forced selling can occur.

And investors in volatility investment products like UBS’s Yield Enhancement Strategy, or YES, are getting pummeled weekly as volatility spikes to record levels. Such investments are pitched as safe or low-risk strategies for investors looking for consistent returns but are disastrous during volatile markets.

As with past market hurricanes and earthquakes, investors who are diversified in stocks and bonds usually weather the storm best. And make no mistake, the current market is a hurricane.