Volatile times - but common sense remains the most useful tool
WE live in interesting times. In the UK we are facing an imminent general election, exit from the EU (whether hard or soft, things will never be the same again), the prospect of another referendum on Scottish independence and the implied threat to the continuity of the United Kingdom. This is just the domestic scene.
Overseas we have the most unpredictable US President in recent memory, growing concerns about the “rogue” state of North Korea and also concerns about Russia and its relationship with the new US administration. In addition we have the increasing unpredictability of terrorist threats (three major incidents in the UK in three months).
This does not paint a picture of stability on a domestic or global basis. But financial markets have been more sanguine since the beginning of the year and the Chicago Board of Exchange Volatility Index (universally known as the VIX index) is at an incredibly low level and has been for some time.
This has been dubbed the “fear index”, but it appears now that either it is very out of step with the global situation or that we are looking at it in the wrong way. It is important to be clear that the VIX is purely a measure of implied volatility and a short term measure of sentiment in the market.
Volatility is used to express risk, but the very low level in recent months should not be taken as a sign that the markets will remain flat and in fact the last time we saw such low levels was in 2006-07, just before the financial crisis.
In reality such measures are only one tool in investment. These days we are bombarded with information from all directions and theories abound as to how it should be interpreted and used to best advantage. Investment is a very personal thing as is an individual's attitude to risk. What really matters is to have a clear understanding of your own reward and risk requirements and to be able to select asset allocation and investments accordingly.
Investment always carries risks and it is important to accept this; the focus should be on mitigation rather than avoidance and achieving an optimal reward. Not an easy task in such uncertain times, with so many external factors that we are now more aware of, thanks to the speed of today's media coverage.
Once again, it is worth returning to fundamentals, especially with regard to valuations. There is a great deal of coverage on justifying why in vogue stocks are valued so highly, but the essential point is whether earnings will ultimately justify such astronomic ratings. It is the same with markets: there is often a lot of hope riding with market valuations such as speculation that a particular economic policy will result in acceleration in growth.
There is little certainty in whether these policies will be implemented and there is no magic solution, contrary to what politicians would have us believe. There are no easy answers to investing in such challenging times, but common sense remains the most useful tool.
:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.