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Dec. 9, 2011, 2:14 p.m. EST
By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) "” "Stop this crazy thing!"
The stock market's G-force gyrations may remind some investors of cartoon character George Jetson's anguished cry when he slipped on his treadmill and went around and around in elongated circles.
European nations are preparing to print currency not used since 2002, in the event the euro is abandoned. (AP Photo/Petros Giannakouris)
Indeed, if you are an individual investor concerned mostly about retirement, and have no designs to become a day trader, market-timer or algorithmic genius, then excessive market volatility isn't doing you any favors.
Welcome to Fear Factor: Wall Street. Stocks' volatility since their seismic 2008 meltdown is pushing many people into poor, knee-jerk, market-timing decisions.
"Extreme down, extreme up moves are just brutal for investor results," said Russel Kinnel, director of mutual-fund research at investment researcher Morningstar Inc. "You'd sell in the downturn, and then miss the rally, so you effectively sold low and bought high."
Bottom line: With contentious national elections next year in the U.S., no clear resolution yet for the European debt crisis, dramatic social shifts in the Middle East, and slower corporate earnings growth worldwide, high volatility "” and high anxiety "” isn't going away. Your challenge is to stay on your feet in an unpredictable political and economic climate that will continue to confront and confound for the foreseeable future.
For support, some investors are turning to exchange-traded funds that follow a "low-volatility" investment approach to stock markets, both in the U.S. and globally, including emerging markets. While the strategy tends to lag in rallies, it typically outperforms poor or sideways markets with considerably less shake, rattle and roll.
Reducing downside volatility is crucial for most investors. No one complains when volatility propels stocks higher. It's the sharp cracks that knock folks flat.
But if you're cushioned against the blow and either don't lose money or lose less than the average, then you're less inclined to panic and have a better chance of landing on solid ground sooner.
It's basic math: Lose 50% and you need a 100% gain to get even; lose 20% and a more attainable 25% rebound makes you whole again. Moreover, losing less means you earn more over time through compounding.
Extreme U.S. market fluctuations have become more common in the past 10 years, jarring investors who came to stocks in the 1990s "” a period of relative calm and above-average gains. In the past three months alone, the Standard & Poor's 500-stock index /quotes/zigman/3870025 SPX +1.52% has experienced 2% plus-or-minus swings on more than half of the trading days "” including Thursday's 2.1% loss.
When investors can't take the heat, they get out. Typically they exit near a market bottom and then jump back in, if ever, only when it's clear that stocks have resumed their climb.
Somebody makes money on that deal "” just not you. To stay on track, you have to slow the investing treadmill to a comfortable pace.
But how? You could reduce a portfolio's sensitivity to market swings by putting more into bonds or cash, as many investors have been doing for several years. But that's a market-timing decision, and bonds will be a lot more volatile once interest rates rise.
You might also consider mutual funds and exchange-traded funds that follow "long/short" or "market-neutral" strategies. But the products use derivatives, leverage, short-selling and other fancy hedging tactics to control risk. That can be expensive, and results don't necessarily live up to their billing.
Low-volatility investing, in contrast, is a long-only strategy without bells and whistles. This approach, which is popular among institutional investors, involves owning stocks that exhibit what's called low "beta," meaning they trade differently from the market.
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BREAKING
Gold settles 0.2% higher at $1,716.80
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