Did volatility really kill the cat?

Considering the economic outlook for the remainder of 2008, this could be a more appropriate question than you might think. As far as I can see, that cat better be careful!

I'm sure you're asking yourself, "What is volatility and how does it relate to cats?" Simply put, there is no connection between volatility and the animal kingdom. By definition, volatility is a measure used to quantify the risk present in any type of stock market investment. It refers to the up and down movement seen on a daily basis in the price of stocks, bonds, mutual funds, etc. Typically, the greater the inherent risk, the more volatile the investment (see the investopedia.com volatility definition).

So, why do I find it necessary to write about volatility right now? Well, 2008 may be one of the most volatile years the stock market has ever seen. Ask 10 people about their attitude on the US economy over the next year, and you could very well get 10 different answers. With the US Dollar dropping to uncharted territory, the price of oil, gas and other commodities skyrocketing, residential real estate plummeting, and unemployment looking grim, it's no wonder that the future looks a little cloudy. Combine these concerns with this year's title fight, I mean presidential race, and it all starts to make sense. No one has a clue about where we go from here.

Everyday, new reports come out filled with economic data, and everyday the market reacts positively or negatively to the news. The sheer fact that we see volatility based on these reports is common, it's the size of the ebbs and flows that we need to focus on. Normally, an active market means big money for investors, because let's face it, no one wins in a quiet market. To a Wall Street trader, volatility equals opportunity. The stock market is based on this idea.

But... where do we draw the line? When is too much volatility a warning sign? These are the questions of today. Although, good investments always exist, it is more important than ever to pay attention to the asset allocation in your portfolio. When people feel the most comfortable with a particular asset class (i.e. commodities), it just may be time to look for the next trend. Opportunities are plentiful in today's market. Just be careful... and PLEASE don't act on emotion! Those that let feelings get in the way in this volatile market, may end up just like the cat!