Ups & Downs: Investing in Highly Volatile Equities Markets.

• Author: Freedman, Mitchell
• Position: Wealth management

in January, when 'first proposed writing this article, it was going to have a different headline and intent. I was going to write about investing when markets appear to be highly valued. But on Jan. 26, the Dow Jones Industrial Average closed at 26,617--its all-time high. Shortly thereafter it went into virtual free-fall.

Stock market volatility, which had been muted for almost all of 2017 and into 2018, returned with a vengeance. Looking at a graph of The Dow's performance since late January, one can compare it to an EKG of a patient with heart arrhythmia.

A recent article illustrated that during 2017, average stock market volatility was lower than it has been since 1964. Many economists, portfolio and investment managers, and other so-called experts, began predicting that volatility would return during the closing days of 2017 and early 2018 when the equities markets seemed to achieve new highs almost every day.

History has shown that they don't always--in fact, they rarely--foresee future investment returns or market behavior accurately, but this time experts got it right.

So, how should one invest when markets arc volatile? Should investors sell and "keep their powder dry," waiting for more stock market stability? Should they attempt to time when to buy in and sell out of the markets? Should they perform wholesale repositioning of their investment portfolios? Should they keep at least one eye continuously on the stock market's activities and trade (buy and sell based upon their feelings or other criteria)?

These questions involve serious decisions as there is a lot at stake for individuals who have their personal wealth and retirement investments at risk.

What's the Risk?

Let's circle back and take a look at the primary risks one takes when investing in securities:

1. Inflation: The loss of purchasing power over time due to increasing prices (investment returns should exceed inflation).

2. Concentration: Too much investment in an asset class or particular security (all or too many eggs in one basket).

3. Geopolitical: Political events, policy changes or instability in a country or region.

4. Interest rate: Higher interest rates lead to lower valuations for fixed income securities and vice-versa.

5. Credit: Required interest or principal payments may not be able to be made reducing the value of fixed income securities.

6. Currency: Changes in foreign currency rates will impact investment valuations in U.S. dollars.

7. Illiquidity: Difficulty...