'Volatility of Volatility' Is Major Threat To Financial Markets - Beschloss
(Kitco News) - While markets continue to enjoy an unprecedented period of low volatility, the chief executive officer of one global investment management firm warns that investors cannot be complacent.
Speaking to Kitco News on the sidelines of the 24th annual International Economic Forum of the Americas in Montreal, Canada, Afsaneh Beschloss, founder and CEO of Rock Creek, said that the growing threat to financial markets is the “volatility of volatility.”
She explained that the rate of change in volatility has jumped, noting that on Feb. 5, the CBOE Volatility Index ($VIX) saw its most significant one-day jump in history as the index went from 18.44 points at the open and to 38.80 points at the close.
“This type of volatile tells us that there is a lot of uncertainty in the market,” she said.
Beschloss said that these unexpected spikes in volatility are a risk to financial markets because they can be challenging to manage.
“The increasing rate of change in volatility is too fast. It makes planning for the future very difficult,” she said. “Because of an uncertain future, households are not going to spend and businesses are not going to invest in future growth.”
To protect themselves from the extraordinary bouts volatility, Beschloss said that more and more companies are increasing their cash reserves. Instead of investing in future production, companies are using the extra cash to support their share prices, which she added could lead to to unsustainable growth.
While moving into cash is one way to protect against this environment of uncertainty, Beschloss said that investors should also create a portfolio that looks at the long term.
While Rock Creek is not heavily invested in the commodity sector, Beschloss said that there is a case to be made to include commodities in a balanced, diversified portfolio.
However, she added that the difficulty comes in finding the right commodity.
“Do you invest in gold, platinum, or maybe even cobalt as that is very popular right now? Copper is also having a fantastic year,” she said. “Unless you are an expert in commodities, it can be difficult to find what is going to be a store of value in the future.”
For investors who want to include commodities in their portfolio, Beschloss has one piece of advice: “only hold what you know about.”
As for gold, Beschloss said that she doesn’t see a lot of value in the precious metal. Her one experience with the yellow metal dates back to the 1980s when she was in an investment training program.
“One day we had a high-net-worth group come in and talk to us. They told us that they were telling their clients that gold was a great investment,” she said.
After the seminar, Beschloss spent about half her monthly salary and bought a gold certificate for $1,000. Today that certificate is worth $1,300 an ounce, a 30% increase in 30 years.
“Three-hundred dollars in 30 years is a high amount,” she said.
Beschloss still has that gold certificate, only because she can’t get rid of it.
“I can’t find a way to sell it. Nobody knows anything about this certificate from 30 years ago, so I’m just stuck with it,” she said.
Looking ahead, Beschloss said that the one commodity that is currently undervalued is fresh water.
“I don’t know in how many years, but fresh water is going to be a lot more important than oil and gold,” she said.