Volatility - Life's Strengthener

"It's a lot of random situations that combine in a certain volatile form and create a bigger-than-the-whole situation that nobody could have predicted." - Paul Kantner

As investors we love to try to predict future events.  Predicting them correctly gives you an edge and will make you a lot of money so people spend countless hours creating models that they think will capture the majority of future events.  Using these models they construct portfolios that will benefit from these predictions but more often than not the predictions turn out to be hopelessly poor and future events are not even remotely close to the predictions.  When an analyst guesses correctly (and I use the word guess rather than predict) he or she is an instant media sensation and all future predictions are taken very seriously.  Take Meredith Whitney or Noriel Roubini as two examples.  Both predicted massive economic collapses and both are now hero worshiped but since that one time prediction they have had limited success but for some reason people continue to take note whenever they speak.

Volatility is seen as investment risk.  The more volatile the markets (volatility refers to the movements up and down in the market, the more the market gyrates the higher the volatility) the higher the risk for the simple reason that trying to predict future market moves when it is gyrating around furiously is almost impossible.  For this reason investors tend to buy and hold rather than trade the market.  Buying the market locks in market rates of return and for most that is a simple way of investing.  Do not worry about daily market movements and rely on history to repeat itself with a continued long term rate of return in excess of 8 percent.  The problem with this strategy is that you never can predict when you will require the money.  What if you fall ill or lose your job?  Typically both or one of these events occurs right at market lows as the economy is weak causing layoffs and illness due to stress and anxiety.  So right when you need the money the value of your portfolio is at its lowest.  Withdrawing funds at this point is not optimal which is one of a litany of reasons why the majority of investors receive sub par returns.

Volatility in nature however has been used to strengthen the whole.  Nature has had to deal with unknown events for billions of years and the results are humans.  Every time something spectacular occurs nature's resilience allows it to use the catastrophe to become stronger allowing future generations to benefit from the event by being immune to future events similar to the last one.  What nature realizes though is that while you can try to prepare for the unknown it is just that, unknown so the best thing that you can do is to latch on to the strongest cells, the ones that survive the catastrophe, allowing the weak ones to die and so evolve into a stronger organism.  That said there are events that could wipe humanity off the earth but nature will once again evolve into something stronger and revive itself at the expense of the weaker race of humans.

So one thing we know is that volatility is here to stay.  As much as the Federal Reserve and an army of Wall Street investment bankers try to hammer it into line the more it wiggles.  In trying to box volatility in it creates a wild untamed beast that eventually finds an exit and once it does it creates havoc with portfolios around the globe.  Furthermore as the globe becomes more and more joined at the hip economically speaking the greater the volatility and the less control one Federal Reserve has against the growing multitude of global problems. 

Now what if instead of fearing volatility and the effects that it has on your portfolio you embrace it by creating a portfolio that benefits from increased volatility?  In his book Antifragile Nassim Taleb suggests that this is the best way to invest and I have to say that I agree.  In fact this is one of the main themes to my recent book How to thrive in the Obama economy and I am proud to say that I had not read Taleb's book prior to writing mine.  Creating this type of portfolio is possible but it will take some effort and education on your part but I advise you that it will be well worth your time and effort as not implementing these strategies will play havoc with your portfolio and your retirement options.  For this reason I am launching a radio show on November 15 on ESPN 1700 AM radio that will attempt to educate people of the pitfalls of investing your hard earned money in a "normal" portfolio and will give ideas as to where to look to create a portfolio that becomes stronger the worse things get and believe me they are not going to get any smoother.  I invite you to read my book and tune in on Friday afternoons between 2 and 3pm as we launch the show and try to help you achieve your investment goals but outside of this it is extremely important that you ensure that your portfolio benefits from these major market gyrations rather than implodes.