With most investors on holiday in the month of August, stock market volumes are traditionally low. That said, this drop in trading activity in the main financial markets, combined with the effect of specific economic and political events, has often fuelled a rise in volatility and huge fluctuations in prices over the summer.
So far 2017 has been calm in terms of volatility, with the VIX currently at record lows of 9.67% compared with the average of the last 10 years of 20.62%. By mid-July, the Ibex 35 had chalked up a return of 13.93% over the year, while the Eurostoxx has registered an accumulated 7.15% return.
However, if we look back, many people will remember that terrible summer of 2011, when the Ibex 35 fell around 17% between July and August and the VIX shot up, surpassing levels of 45%. August 2015 is a bit closer, a month when the Spanish the blue-chip index declined about 8%, with volatility levels at around 40%.
Now I would ask you not to misinterpret what I am saying. I am not trying to be alarmist, quite the contrary. I don’t think or expect that the same will happen this year as happened in 2011 or in 2015. What I want to higlight is that while the summertime may seem like a transitory period when the markets are calm until investors “go back to school” in September, the situation has been quite the opposite in the last few years.
In order to manage our portfolios, in this month of August as well as at any other time of year, it’s essential to define our investor profile and more specifically our risk aversion – if this hasn’t already been done. These factors will show us what type of assets we should hold on to or incorporate into our portfolio and the level of diversification we should implement. Exposure to different asset classes will be a key factor in determining how good our results are.
Bearing in mind we are looking at a short period of time, my advice is that this should not condition our decisions. Unless we are traders, with a more short-term view, our investment strategy will establish objectives for the medium and long-term.
As I said at the beginning, the markets can suffer significant fluctuations in the summer, with peaks of volatility. But that should not determine the performance of our portfolio. If it is well diversified, with assets which have significant discounts based on fundamentals, we have nothing to fear during the month of August. It should be a period which complements the rest of the year.