Overview

  • Market volatility has been on the rise.
  • In trying to avoid stock market volatility, many investors have missed opportunities.
  • Alternative investments can help to mitigate volatility in investor portfolios while providing attractive returns.

What is Volatility?

Volatility is a measure of market risk based on the fluctuation of returns in response to external factors, both negative and positive. For instance, economic surprises, geopolitical events and even investor sentiment can cause sharp market movements either up or down. Volatility is typically represented by standard deviation, which measures the variance in the average returns of a specific market or investment over time. Less variance of returns means lower volatility and therefore lower risk.

Volatility Is on the Rise

The past few years have seen increased volatility in the financial markets. For instance, average volatility (standard deviation) of the S&P 500 Index during the 1990s was 13.66% but increased to 18.02% since 20001.

The chart below illustrates this trend, with a relatively smooth upward curve through the 1990s but significant swings up and down since about the year 2000.

Volatility Has Been On the Rise

Investors Have Paid the Price

Often, a byproduct of volatile markets is significant downturns, which require even larger recoveries. For instance, after a 40% decrease, you need an investment to increase nearly 70% in order to return to where you started.

It Can Take Years to Recover From a Market DownTurn


In addition, market volatility, similar to a roller-coaster ride, can cause extreme anxiety for many investors. When sentiment is low, emotions can drive investment decisions, which often results in underperformance. Frequently, market sentiment is lowest when the opportunity is strongest. Rather than buying when markets are at their lowest and set to rebound, many investors buy at market highs and sell at market lows, lowering the performance of their portfolios.

Investors Have Underperformed

Alternatives Can Provide Similar Returns with Less Volatility

Diversification can help lessen portfolio volatility. By using additional sources of income such as alternatives, investors can decrease their reliance on traditional market returns and potentially lessen their overall portfolio risk. It should be noted that diversification strategies do not ensure profits or protect losses in declining markets. In general, alternatives rely less on broad market trends and more on the strength of each specific investment.

Alternatives Have Offered Attractive Returns with Less Volatility

1Source: Bloomberg, Barclays Live. Investing involves risk. Past performance does not guarantee or indicate future results. 60/40 portfolio is represented by 60% S&P 500 Index and 40% Barclays U.S. Aggregate Bond Index rebalanced quarterly. Annualized returns based on quarterly data for each index from 1990 to 2000 and 2004 to 2013, respectively. Risk is based on the standard deviation of the quarterly return series from 1990 to 2000 and 2004 to 2013. Indices are unmanaged and it is not possible to invest directly in an index. The returns of these indices do not reflect the deduction of any sales charges or fees. The performance and risk information above reflects relative returns and risk information only for the periods indicated. Use of other beginning or ending points, or of a longer or shorter period, would result in different relative performance and risk information.

The information on this website is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

Incorporating alternative investments into a portfolio presents the opportunity for significant losses. Also, some alternative investments have experienced periods of extreme volatility and in general, are not suitable for all investors.

Investing in alternative strategies such as a long/short strategy, presents the opportunity for significant losses. There is also the possibility that long and short strategies could both fail, thereby increasing volatility and potential losses.

Hedge funds may not be suitable for all investors and often engage in speculative investment practices which increase investment risk; are highly illiquid; are not required to provide periodic prices or valuation; may not be subject to the same regulatory requirements as mutual funds; and often employ complex tax structures.

Utilizing private equity involves significant risks along with the opportunity for substantial losses.

Diversification and asset allocation may not protect against market risk or loss principal.

Please consider the investment objectives, risks, charges and expenses of each fund carefully before investing. The funds prospectuses and, if available, the summary prospectuses contain this and other information about the funds and are available, along with information on other BlackRock funds, by calling 800-882-0052. The prospectus and, if available, the summary prospectuses should be read carefully before investing.

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Prepared by BlackRock Investments, LLC, member FINRA

* Not FDIC Insured * No Bank Guarantee * May Lose Value

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