Volatility is one of the most important indicators in investments, which speaks of the degree of variability in the price of an asset over a certain period of time. For example, stock is worth 100 rubles, and its price every day can fluctuate within ± 10 rubles is a high #volatility. If the stock price is relatively stable every day, this is low volatility..
Usually large and well-known companies have low volatility - their shares fluctuate within 0-1% Every day. Small growing stocks are more volatile - their stocks can rise and fall to 50% per day or more.
For the market as a whole, volatility can also be measured. Usually an index is taken for these purposes., for example, #indexMosExchange or #S&P500. In large, developed markets less volatility, than developing.
For speculators and traders, an increase in volatility is good and means, what is the opportunity # to earn, as well as losing. They don't care, where will the price go (up or down), the main thing is to have active movement.
There is an opinion among professional investors, that the portfolio needs to be collected in this way, to have maximum # profitability with minimum volatility. In other words, less hassle from market fluctuations and more #profits.
The most famous principle of building a portfolio taking into account volatility is the Markowitz model. Hedge funds work according to these principles., whose task is to manage assets at a given risk and maximum profitability or at a given profitability with minimal risk. Someday I will write a post about building an investment portfolio using the Markowitz model.
With all due respect to the Nobel laureate in economics Harry Markowitz, I, being a long-term investor, I prefer to treat market volatility as a speculator or #trader. Now I will explain the essence, read in the carousel!
Markowitz's portfolio theory suggests, to maximize profitability with minimal risk. But as you know, the profitability is directly proportional to the risk., ie. the higher the risk, the higher the yield. It follows from this, that profitability is limited by risk. It is impossible with the same given risk to increase the portfolio's profitability in a significant way.. There will always be a limit to this profitability.
To overcome this limit, need to take the risk, ie. market volatility. If in the short term volatility is 100% unpredictable risk, which is impossible to predict, nor use for additional profitability, then in the long run volatility becomes an investor's friend.
The fact, what if we take the market as a whole and in the long run, then you can notice, what is this market (economics) grow in an undulating manner. Simply put, periods of growth give way to fall (Crises), but in general the economy is developing and growing. Why isn't volatility? look schedule index of any country and see the jumps: rise-fall, rise-fall, etc.. Volatility is evident.
Why try to minimize that, what is natural for the market? I think, this should be used to maximize the return on investment. If I am given a choice 2 hypothetical markets with the same CAGR, one of which will be linear (smoothly) grow, and the other - in leaps and bounds (volatile), then I will choose the second, because on this you can get additional income.
It is important to understand, that you can only get income if you have a well-planned investment strategy. For example, I invest more in stocks when the market falls, than with the growth of the market. Many subscribers know about it.. Ie. I have described the amount of purchase of shares when the Moscow Exchange index falls (as an indicator of the whole market) every N% In my case it is 10 thousand rubles a month at least and plus another 10 thousand rubles additionally if the index falls every 5% relative to the maximum.
For example, if in September the Moscow Exchange index. will fall on 12%, then I will buy shares at 10 (minimum) + 20 (two falls on 5%) = 30 thousand rubles.
Eventually, this gives an advantage to my portfolio, all other things being equal If we discard the quality of analysis and selection of stocks in the portfolio and present, that I only invest in companies from the Moscow Exchange index in the same proportion every month, then portfolio, slave according to the described strategy, will give higher profitability, than the index. All this is due to additional investments during the fall in stock prices.. Further, with market growth, these shares will give additional growth.
But such a strategy will also increase the loss., if the market falls, as I noticed from experience. Look at the picture below. It shows a graph of the return on my portfolio. IIS in comparison with the Moscow Exchange index. You can often see this graph in diaries. IIS.
Volatility of the Moscow Exchange index
As you can see, with the growth of the market, the portfolio outperforms the Moscow Exchange index in terms of profitability: +1: But take a look at March 2020 of the year. Then the market fell and the result of my portfolio was half as much! Ie. professionally speaking, the volatility of my portfolio is twice as high, than the volatility of the Moscow Exchange index. Very roughly speaking., with an increase in the index by 1%, my portfolio is growing by 2% and also when falling.
If there is a crisis now and the markets start to fall, then the picture as in March 2020 on the chart will repeat again. The index will go deep into the minus, and my portfolio will generally collapse into the abyss in proportion to the index with a coefficient of about 2x.
S index volatility&P 500
But I am aware of this and accept this development of events.. You can say, what is controlled volatility. I look forward to, what in the long run (Decades) markets are growing, only occasionally being in crisis. I am willing to sacrifice a losing portfolio versus index during crises for a better overall long-term performance.
