“It’s quiet… too quiet” – why feeling comfortable is dangerous

It’s quiet out there.

Since the so-called return of volatility at the beginning of the year, financial markets are seemingly benign once again.  Perhaps it’s the warm summer in the northern hemisphere, but many investors now feel that investing in equities is less risky than it was just six months ago. Indeed, volatility, as measured by the VIX index, is once again subdued.

It is our firm belief that volatility is not a risk (we define risk as the chance of permanently losing some or all of the money you have invested).  Unfortunately, most investors argue the opposite.  Evidence of this argument can be found in the crusade to distil risk into a single, all-encompassing stand-alone statistic, such as ‘Value at Risk’ (VaR). This measure of risk is commonly used to estimate how much an investment may lose over a certain time period at a given level of probability. It does this by looking at the historical volatility. As a consequence, VaR shows unequivocally that the higher the volatility, the higher the risk of an investment.

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