Four Levels Of Volatility

This post was inspired by conversation I've been overhearing at work, from friends, from family, and from random people I meet on the street. Much of the conversation has been about the state of the economy and volatility. They are scared about entering the market again and are debating whether or not to just keep their cash in their low yield savings accounts. I feel your pain fellow Americans! It's a tough time out there but that is not an excuse to miss out on market gains! I totally understand people's hesitation, but it's ALWAYS a great time to enter the stock market. Wellll, if you're in it for the long haul that is haha.

To be honest, if you can't stomach the volatility of the market, it might be better to wait it out. But for those interested in jumping back in, I highly recommend it ONLY if you follow some common sense advice. First and foremost, make sure you have an emergency fund that is fully funded to cover 6 months of expenses for you and your family. The next step is to take a little risk. No risk, no reward, that's life.

But, you CAN manage your risk and create a nice cushion should the market fall. This "cushion" is created through a diversification of funds. I don't recommend individual stocks, especially if you're one who is scared about entering the market again. You should invest through low cost mutual funds, ETF's, or low cost index funds. Although these options are diversified for you, you should take some levels of volatility into consideration.

Remember, as an investor, you want to be compensated for taking risk. Here are four levels of volatility that you should consider depending on how "risky" you're feeling.

HIGH VOLATILITY:

Foreign companies

Growth funds

Micro-cap funds

International funds

Emerging markets

sector funds

Penny funds

Precious metals

Commodities

MEDIUM VOLATILITY:

Large cap stocks/funds

Mid-cap stocks/funds

High-yield bonds funds

Any ETF/index/mutual fund that tracks SP500

Any ETF/index/mutual fund that tracks Dow Jones

Any ETF/index/mutual fund that tracks Nasdaq

LOW VOLATILITY:

Short term corporate and government bonds

Intermediate and long term corporate and government bonds

US savings bonds

Treasury bills

Low risk mutual funds

EXTREMELY LOW VOLATILITY:

Savings accounts

Money market deposit accounts

Checking accounts

Certificates of deposit

So now that you know various investment choices, how do you know which ones to choose? That's the easy part. I like to keep things simple and make my investment choices depending on age. If you're young like myself, I recommend 90% of your portfolio be comprised of higher risk stocks and funds, while 10% is invested in relatively low risk choices like US bonds. If you are close to retirement and have been saving all your life, then these percentages will be flipped. You will want anywhere from 80-90% of your portfolio be in low risk investments such as bonds and savings accounts to ensure that your money is safe during retirement. It's as simple as that folks!

If you're just starting out, you should create a portfolio consisting of investments from all four levels of volatility risk. And remember to not make a newbie mistake and put your emergency fund in stocks! Keep that safety cash in a liquid state at your local credit union or bank.

Until next time!

-JE

By: Jon Elder

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