MAKING CENTS: Volatility is here to stay

Volatility is defined as the liability to change rapidly and unpredictably, especially for the worse. Most seasoned investors have experienced volatility. They also know that investments with higher risk have greater likelihood of volatility and a wider range of expectations in terms of just how volatile your investment may get.

Theoretically, when you look at an investments volatility, you must consider the possibility that your investment can become worthless, with a complete loss of your investment. Volatility can be measured on an investment by investment basis or by broader categories, sometimes calls asset classes. And even these traditional measures of value do not include rare, or black swan events that may throw all of your theoretical knowledge out the window.

A perfect example of events, facts and circumstances as they relate to volatility is today’s real estate market. All over the USA folks are shifting their real estate preferences to a large home with a playground type of yard to accommodate the current staycation trend reinforced by COVID-19. That means the home that was difficult to sell five years ago, larger homes with big yards, are now in favor and hot in most suburban markets.

The same seems to be true in traditional second home areas. They may be near the beach, mountains or in a tax free state in warmer climates, but they too are hot properties today. I wonder if these types of properties are overbought, with too many buyers and not enough sellers. It’ll be interesting to see if these peoples’ lust for the burbs last longer than the hangover from COVID-19. If it doesn’t, these properties will again show signs of volatility as more sellers enter the market than buyers.

Recency bias has people feeling that they’ll be working from home forever just because they’ve been working from home for the past 6 months. As a result, the exact opposite is happening in downtown commercial real estate. This, for example, would not be a great time to own a commercial building in a major metropolitan area with leases approaching renewal. The same is true for parking lots, transportation companies and all of the feeder business that typically serve a bustling downtown.

An optimistic contrarian, however, will look for signs of distress and then begin to accumulate distressed properties with good prospects for recovery. It is these contrarians that show up to buy when prices dip and inventory is plentiful, and that is how the cycle starts all over again.

Just how long a market cycle will last is anyone’s guess. Look at interest rates, for example. Except for a short term rise in rates a few years ago, interest rates have been in a steady downward trend since the 1980s. The moral of that story is just because you bought an investment at a very attractive low price today doesn’t mean that it will turn into a profitable holding for you in the near term or ever for that matter. Sometimes certain investments are inexpensive because they should be.

John Napolitano CFP, CPA is CEO of U. S. Wealth Management in Braintree. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com.