Friday, February 9, 2018

Make Sense Of Low Volatility Investments

By Jeffrey Taylor


Investors want to get the most out of their investment without exposure to risk. Low Volatility Investments are a safe way to put money in stock markets without the risk of fluctuations that reduce the value of your investment leading to losses. This is a defensive way of investing that has been popularized by the recent global financial crisis.

It must be noted that this idea only exists in theory. This means that you cannot pinpoint a stock as being less volatile until it has been tested by the powers in the market. It is the level of exposure that determines whether a stock is volatile or not. Market forces might favor a stock today but expose it tomorrow. In fact, it is only over time that such investment is regarded as less volatile and not before.

Low volatility portfolio label is not a guarantee that you will not make losses. The unique factor is that these losses and the chances of making such losses are less than for other stocks. It takes years to mark a stock as less volatile. The stocks will still experience moments of bulging and slumps. This means that short term observation will return erroneous results. The stocks only protect you from the drastic gains and losses experience in other portfolios.

The returns from LVP are lower. Investors only turn to these stocks because of a lower level of exposure. For a person with better market insight and ready to take risks, LVP is not the investment of choice. This is in line with the principle of business that greater risks bring the best returns. When the risks are reduced, your rate of returns will be significantly reduced.

There is a formula to LVP. The formula that leads to reduction in risk involves the participation of very few players in the stock. Such stock is also not in limelight because it is considered insignificant. Its participation in the market is also on long term basis. This means that every day activities rarely affect its returns. In this light, it is possible to predict the behavior of such a stock over time.

LVP require massive investments in order to realize profits. Notably, the most common investors in LVP are institutions that seek to minimize exposure of their funds. They also know that they will get sure returns because these stocks are not volatile. They have the patience to wait for years before cashing in on such investment. In most cases, they are not interested in immediate returns.

The less volatile investments also experience bullish trading moments. The stocks are not immune to market forces and will therefore respond when the winds favor the entire market. This also means that they can experience sharp falls like all other stocks in the market. This opens a window for short term investors to make a kill or the long term investors to cash in.

LVPs almost provide sure returns but their level of risk is greatly reduced. When the entire market is performing well, they will respond positively. When the market is on a downward spiral, they will also decline. The distinguishing factor is a margin that is slightly stable either during a rise or fall.




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