The Less-Stress Guide to Market Volatility

Market volatility, otherwise known as the fear gauge, plays a key role in measuring a market or security’s price fluctuation over time. It is the rating and scale that users keep an eye on in deciding when to buy and the risk associated with a purchase. It can be equally exciting and terrifying. 

Price Movements Don’t Mean the Sky is Falling

Trying to time the market can lead to stress, frustration, and losses, especially during periods of volatility.

It’s easy to get sucked into the minutiae of volatility when it provides some context to the future, but it is not a fortune-teller. Hence, zooming out and focusing more on the long-term goals of your investments can help you decompress.

But first, let’s understand:

How Volatility is Accounted For

Fixed on the VIX

The main estimate of market sentiment is set by the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) which reflects investors views of future U.S. stock-market volatility. In other words, it is a numerical amount of the upcoming 30-day implied volatility across the S&P 500 Index. When prices rise, so does the VIX, sometimes called the Fear Index. 

If your curiosity is growing, check out the most volatile stocks in the U.S. at TradingView (toggle on the “Most volatile” button in their overview of U.S. stock quotes).

Looking at the Bigger Picture

Besides the VIX, weighing investor sentiment, the general attitude of investors regarding volatility, has proven to be beneficial. This qualitative examination can be combined with other more traditional ways to quantify volatility, like standard deviation, which can help investors quantify how risky an investment might be, and beta (a regression analysis of the volatility of the stock versus the market). 

Collective Actions 

Human behavior also adds an emotional layer to market volatility. Impulsive decisions like panic selling increase price swings. In a similar fashion, social, macroeconomic, and political influences, like the upcoming election, can trigger behavioral biases like groupthink or herd mentality. Actions of this nature encourage the market to react; thus, volatility adjusts accordingly. 

Pay Attention to Lending

According to Derek Izuel, CFA, Chief Investment Officer and Portfolio Manager at Shelton Capital Management, the easiest way to measure volatility is how expensive it is for companies and people to borrow money. Izuel suggests that a heightened sense of market fluctuations that is not reflected within the lending data is likely temporary. 

Preparing with Proactivity. 

Think back to a time when you were in the thick of a transitional phase—a new job, a big move, or a new relationship. It’s unlikely that everything went seamlessly. Parallel to market volatility, we must weather different phases in our lives.  

One way to avoid knee-jerk reactions is to separate your emotions by setting rules and guidelines for your investments before buying or selling. 

Reduce the Turbulence 

Volatility is just one of several economic indicators  to pay attention to. With an overloaded plate, following strategies that seek to reduce the impact of volatility— like dollar-cost averaging, portfolio diversification, and asset allocation—may reduce stress and allow you more energy to focus on making your money work for you. 

For those seeking funds that aim to reduce a degree of market volatility, the Shelton Equity Income Fund (EQTIX) and the Shelton Tactical Credit Fund (DEBIX) are two funds  that seek to deliver cash flow and dampen overall portfolio volatility.

Important Information:

Investors should consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. The prospectus contains this and other information about the fund. To obtain a prospectus, visit www.sheltonfunds.com or call (800) 955-9988. A prospectus should be read carefully before investing.

The Shelton Tactical Credit Fund invests without restriction as to issuer capitalization, country, credit quality and without restriction as to the maturity of fixed income securities. The Fund generally will take long positions in securities believed to be undervalued and short positions in securities believed to be overvalued. The Fund typically employs derivatives for hedging purposes, such as futures contracts, options, credit-default swaps, and total return swaps.

The Shelton Equity Income Fund utilizes options strategies.  Investments in derivatives may be riskier than other types of investments. They may be more sensitive to changes in economic or market conditions than other types of investments. Many derivatives create leverage, which could lead to greater volatility and losses that significantly exceed the original investment. Positions in equity options can reduce equity market risk, but can limit the opportunity to profit from an increase in the market value of stocks in exchange for upfront cash as the time of selling the call option. Unusual market conditions or the lack of a ready market for any particular option at a specific time may reduce the effectiveness of option strategies and could result in losses. Investors can lose premium paid to purchase the option if it is not exercised.

Options involve risk and are not suitable for everyone. Prior to buying or selling an option, your client must receive a copy of characteristics and risks of standardized options. Copies of this document may be obtained from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500, Chicago, IL 60606 (1-800-678-4667).

Shelton Funds are distributed by RFS Partners, a member of FINRA and affiliate of Shelton Capital Management.

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The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future.