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Nicholas Kitonyi
Nicholas Kitonyi
Articles (317)  | Author's Website |

How Do You Tackle Volatility in 2020?

Market volatility could rise this year as US-Iran conflict threatens to escalate and an election looms

January 07, 2020 | About:

The year 2020 could be a definitive period for investors given the political events that are scheduled to take place. A number of key breakout industries of the last decade could also be reaching maturity, while a global financial crisis could also be in the offering within the next several years.

Between 2009 and 2019, the S&P 500 recorded its best performance yet over a 10-year period, rallying from around 950 points in 2009 to more than 3,200 points at the end of last year. This is partly why some analysts think the market could go through a major pullback in what is seen as an overdue correction.

And with the U.S. presidential election due later this year and a busy campaign period before that, there could be several twists and turns in the market. Therefore, this could be the perfect time to take a deeper look at your portfolio and reassess your investment strategies and potential opportunities for diversification.

Alternative investment vehicles that could help diversify your portfolio

Depending on whether you are a long-only investor, a dividend growth investor, a deep-value investor or a sophisticated "jack of all trades," 2020 could be ideal for a portfolio reset. This could be done by mixing up your investment strategies a bit by leveraging emerging investment tools and techniques to minimize risk exposure.

The U.S. market could experience a significant increase in volatility because of the political events expected to take place later this year. In addiition, markets are already becoming vulnerable to the U.S.-Iran conflict, which could escalate unless a truce is reached. So with the market sentiment beginning to point toward a highly unpredictable future, what are some of the measures investors could take to profit from or cushion against the rise in volatility?

Fixed-income mutual funds

Last December, Federal Reserve Chairman Jerome Powell’s comments suggested that it could be a while before the market sees another interest rate hike. In fact, some analysts have gone on to suggest that another rate cut is more likely given the inflation target and global economic pressure.

The yield curve has resumed to normal (long-term treasury yields are now higher than short-term yields), with the 10-year note reading 1.825% and the three-year note at 1.567%. With the level of market risk expected to rise, however, a return to an inverted yield curve could be on the horizon.

Therefore, investors could look to low-risk, short-term fixed-income mutual funds like the Vanguard Short-Term Corporate Bond ETF (NASDAQ:VCSH) and Vanguard Short-Term Government Bond ETF (NASDAQ:VGSH) to diversify their portfolios.

The Vanguard Short-Term Corporate Bond has an expense ratio of just 0.5% and a yield to maturity of about 2.8%. Investors can also explore opportunities offered by the Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT), which is available at an incredibly low expense ratio of 0.05% and offers a yield to maturity of 3.4%.

Fixed-income mutual funds and government securities could provide an alternative avenue for investors looking to cushion themselves against extreme exposure to market risk, thereby helping to diversify their portfolios. But what about taking advantage of volatility?

Trading market volatility

There is a common saying that volatility is your friend when it comes to short-term stock picking. Basically, this means taking long and short positions on stocks based on price fluctuation. However, this is not practical for most investors because of the high margin requirements that a broker requires from those who look to short the market. It can also increase the level of risk to individual traders depending on their experience and expertise.

Markets have evolved over the years, however, and even hedge funds are now using revolutionary stock trading tools that leverage technological advances and artificial intelligence to predict market movements.

Quant funds are now increasing in number and have been outperforming some of the best-performing mutual funds in the market for the past several years. However, they are also not accessible to retail investors with limited capital. As such, most retail investors have tried to emulate similar trading techniques by using contracts for difference (CFDs) brokers to trade price fluctuations of blue-chip stocks. Gain Capital Holdings Inc. (NYSE:GCAP) is one of the leading providers of such services, but the list is even longer for European investors as reviewed by CFD broker review website 55brokers.com, which also discusses in detail the pros and cons of trading via CFDs.

This provides an alternative route for retail investors that have no access to quant funds to make money in highly volatile markets.


In summary, 2020 could be an ideal time to take a deeper look at your portfolio strategies because, in addition to the expected increase in market risk, some key industries that drove markets higher in the last decade might have already peaked, and this could limit general market growth. Furthermore, the global economic slowdown appears to be taking its toll on the U.S. market, which is partly why it could be a while before we see another rate hike.

Disclosure: No positions.

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About the author:

Nicholas Kitonyi
Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

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