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Kathleen Nemetz

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Kathleen Nemetz, Certified Financial Planner (TM) Practitioner
Thinking about selling portfolio positions because of market volatility? Read this first.
Lower Your Portfolio Risk.
Diversification can help reduce the variance you may see in your month to month portfolio valuations.


If you are an average investor, any one month's downturn might have you second guessing whether your investment plan is still on track. You may even consider selling positions, as you look to regain confidence in the future direction of your portfolios.


Market downturns do happen, as the nature of the equity markets is to oscillate.  Normal volatility for a portfolio can be said to lie somewhere in the range of average fluctuations for stock and bond indexes.  If your holdings include both stocks and bonds then you would measure volatility against the same weights of the relevant indexes.


On any one day, the market might swing a few percentage points while bonds might oscillate relatively less.  On days or in times of enhanced volatility, the market fluctuations may move beyond their normal range, that is, beyond one standard deviation. 


Before judging whether your own portfolio is too sensitive to market changes, meriting a reset, you might first examine historic rates of fluctuation for various indexes. You can then judge whether you should lower your weight in stocks or risky holdings, to lower the rate of change of a portfolio with closer tendency to a mean.


Fourth quarter is a great time to take stock of your risk profile as we near the year's end. You may want to recalibrate, to subtract some risk from your holdings as you look for more reward on the upside.  Having losses to deduct in a taxable portfolio may actually be a good thing if you are netting losses to reduce taxable gains for this year's tax filing. This is especially important for investors in higher tax brackets, as rates of taxation for gains have climbed upward.


However, in identifying candidates to sell it is also important to consider the relative role of various assets in a portfolio. Ideally, you don't want all holdings going up at the same time; neither do you want them going down at the same time. This would be perfect correlation. By maintaining some uncorrelated assets, holdings that actually complement one another, you can lower the overall volatility as measured by standard deviation.


Turning back to the subject of volatility, I'll use an example drawn from six years of data, comparing a large household consumer products company stock with the S&P 500 index, and a corporate bond index.  The table below shows that the household products stock, considered to be a consumer staple, is much less reactive than the general S&P 500 index.  The corporate bond index is much less reactive than either of the stock indexes.


Reactiveness is measured by standard deviations, that is the amount of movement around the average returns expected for these holdings.  Returns fall along a bell curve, with 95% of curves being within an expected range of one or two standard deviations. The larger swings would be isolated experiences, in less common years such as 2008.


Don't focus too deeply on lowering your volatility, without thinking about the return that you will need to achieve your goals.  Equities on the average return more growth than do bonds. Unless you have accumulated significant assets already, you may be forced to consider some market volatility to reach your goals. Market returns can help grow your assets over time using to supplement your cash infusions.


Including some non-correlated assets can help reduce average volatility by introducing different rhythms to market fluctuation. Non-correlated assets may include additions of real estate (REITS), precious metals, foreign currency indexes, market neutral funds or muni bonds into a portfolio mix.  It's important to consider these assets in your portfolio mix if you are noticing too much swing in any given month or interval.


So what is "average" volatility? One large banking institution published statistics this year stating that US Large Cap stocks can move 16% up or down in any one year; while muni bonds may only move 4% in the same period. Emerging market stocks and indexes might move as much as 25% up or down in a single year. Commodities can be almost as volatile.* For this reason some of these assets should be used only in small measure, to remain within a moderate risk tolerance range.


Putting together the right balance of assets to lower volatility demands careful consideration of these statistical realities.  If any one stock is throwing the whole portfolio out of balance, it might be a signal to harvest it.  Should you find you are increasingly less tolerant of the outliers consider taking less risk going forward.  This is a great discussion to have with a financial planner who can help you balance risk and reward as you save toward goals.

**J.P. Morgan correlations and volatility study, 9/30/2014. 

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Kathleen Nemetz, MBA, CFP, CDFA™
Financial Advisor

McClurg Capital Corp.
950 Northgate Drive Ste. 301
San Rafael, CA 94903

415.472.1445 x 306

CA ins. lic. 0E71423



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