Volatility and Risk

In the process of our day we spend a lot of time looking at and understanding risk. As part of this understanding, the first thing we have universally done is place an understandable definition on risk. In mathematical terms, risk is measured in or as standard deviation. In every day terms, risk, most times, is defined as the probability of losing money, or loss of capital. Rarely when people make money do they articulate how risky the investment was or seemed. In the end, we are all just happy to be making money and the risk associated with this typically serves little purpose.

 

In the market place we see risk defined by the VIX. The VIX is a market instrument that reflects an estimate of future volatility, based on a wide range of different dates in the future. The month of October demonstrated what most of us were feeling — October was volatile! The graph below shows the price action of the VIX over the time period articulated. Visually, we can see that volatility spiked up. Translated, this means the risk in the market place was generally higher. We also experienced a sharp decline from a peak as well. This action happened in, literally, a few days.

 


Source: VIP Wealth Solutions and Bloomberg

 

In sports terminology, we know from history that offence wins games but defense wins championships. Generally, we felt more defensive through the month of October.

 

Risk in context is important. We know from history that the elevation of risk recently was only a fraction of how risky things can get. When we looked back at 2010 and 2011 it was graphically clear that things can or might get a lot riskier. The future is yet to be written but consider that context provides a pinch of caution at critical junctures. Things can, and will, get risky again.

 


Source: VIP Wealth Solutions and Bloomberg