Investing: Getting a read on a less volatile market

Judging by the level of market volatility, investors have settled into a “cheery” complacency, said Paul Lim in The New York Times. The Chicago Board Options Exchange Volatility Index, which essentially gauges market fear, recently reached its lowest level since September, prompting optimists to gloat that the rally that began in early March is the real deal. “But don’t assume that volatility is gone for good.” Most bear market recoveries endure one or several “retests” of their market lows. These declines can be relatively benign, but they can also be “frightening.” After the market rallied back in October 2002, for example, the Standard & Poor’s 500 still ­suffered a 15 percent aftershock. Given the “tremendous appetite for risk-taking” that investors have shown over the past couple of months, a double-digit setback is a very real possibility.

That’s why investors need to keep their expectations in check, said Pete Carey in the San Jose Mercury News. While the economy has shown signs of improvement, it’s still marred by “high unemployment and sluggish retail sales.” In this fragile economy, says Cupertino, Calif., financial planner Lloyd Yamada, “it doesn’t take a lot” to touch off another run of the bears. That’s not to say investors should cower on the sidelines. “If you have $10,000, put $1,000 in a month for the next 10 months,” says Chuck Gibson of Financial Perspectives in Newark, Calif. “Then you don’t have to worry about timing.”

A little backpedaling may actually be good for the market, said Will Swarts and Dan Burrows in SmartMoney. “It’s all part of the recovery process,” and many investors are anticipating it. Without a pullback, “nervous investors will cash out” once the Dow Jones industrial average flirts with 10,000. “But if we have a retest back to around 7,800 in the interim, that will pull cash into the market, setting it up for a more sustainable run.” In the meantime, experts recommend protecting your recent gains with stop-loss orders and adjusting your asset allocation if it’s out of whack. “If the recent run in tech stocks has caused your tech allocation to grow to, say, 20 percent of your portfolio from 10 percent, redeploy or book those gains.” But just remember, “stocks have never moved in a straight line—especially through recessions and recoveries.”

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