Money for The Rest of Us

Investment help and financial guidance for the rest of us.

  • Home
  • Topics
  • Your Info
  • Contact
  • Log In
  • Search
  • About
  • Podcast
  • Guides
        • Asset Classes

        • A Complete Guide to Investing in I Bonds and TIPS (2023)
        • A Complete Guide to Equity REIT Investing
        • A Complete Guide to Mortgage REIT Investing
        • A Complete Guide to Investing in Gold
        • A Complete Guide To Investing In Convertible Bonds
        • Investing in Bitcoin, Oil, and Volatility ETFs
        • Carbon Investing and its Effect on Climate Change
        • Farmland Investing
        • The Opportunity and Risk of Frontier Markets
        • Investment Vehicles

        • A Complete Guide to Investment Vehicles
        • How to Invest in Closed-End Funds
        • What Are SPACs and Should You Invest in Them?
        • IVOL ETF Analysis and Review
        • Fundrise Real Estate Interval Fund Review
        • Money and Economics

        • A Complete Guide to Understanding and Protecting Against Inflation
        • Understanding Web3 Investing
        • Strategy

        • Why You Should Rebalance Your Portfolio
        • What Is Risk vs Uncertainty?
        • Tail Events and Tail Risk
  • Members
        • Tools

        • Asset Allocation and Portfolio Tools
        • Current Investment Conditions and Strategy Report
        • All Investment Conditions Reports
        • Strategic and Adaptive Model Portfolios
        • David’s Current Portfolio
        • David's Portfolio Trades
        • Podcast

        • Plus Premium Episodes
        • Submit A Question to the Plus Podcast
        • Courses

        • Investing in Closed-End Funds
        • Resources

        • Member - Getting Started Guide
        • Member Tools and Downloads
        • Topic Index
        • Glossary
        • Most Influential Books
        • Forums
  • Join
You are here: Home / Podcast / 405: When Volatility Spikes, Financial Things Break

405: When Volatility Spikes, Financial Things Break

October 12, 2022 by David Stein · Updated March 15, 2023

What is volatility and what causes it to rise and fall? How volatility itself contributes to more volatility such as in the example of the chaotic UK government bond market where long-term yields have increased by 4% in 2022.

Rough ocean spray with caption "Volatility Spikes"

Topics covered include:

  • How the role of volatility has changed in financial markets
  • What caused UK interest rates to spike and long-term bond investors to lose 50%
  • What is liability-driven investment
  • What drives increases in volatility and volatility spikes and spillovers are more frequent
  • How to earn income from shorting volatility and what are the risks
  • What we can learn when financial securities blow up

Show Notes

The volatility virus strikes again by Eric Lonergan—Financial Times

How ‘Liability-Driven’ Pension Funds Triggered UK Bond Panic by Loukia Gyftopoulou and Greg Ritchie—Bloomberg

UK government debt and deficit: December 202—UK Office for National Statistics

Markets are more fragile than investors think by Robin Wigglesworth—Financial Times

Volatility and the Alchemy of Risk: Reflexivity in the Shadows of Black Monday 1987—Artemis Capital Management

What Caused the Volatility “Volmageddon” on 5-Feb-2018 by Vance Harwood—Six Figure Investing

Gamma Explained—Merrill

Delta Explained—Merrill

Inside Volatility Trading: Is VIX Backwardation Necessarily a Sign of a Future Down Market? by Scott Bauer

High Income in a Yield-Starved World: Efficiently Harvesting the Equity Volatility Premium by David Berns, Shailesh Gupta, and Peter van Amson—Simplify

Investments Mentioned

WisdomTree CBOE S&P500 PutWrite Strategy ETF (PUTW)

Simplify Volatility Premium ETF (SVOL)

Episode Sponsors

Masterworks – invest in contemporary art

Policygenius

Become a Better Investor With Our Investing Checklist

Become a Better Investor With Our Investing Checklist

Master successful investing with our Checklist and get expert weekly insights to help you build your wealth with confidence.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Related Content

Why You Should Rebalance Your Portfolio

159: What You Need To Know About Volatility

283: Why You Should Care About Carry Trades

424: Are More Bank Runs Coming? The Collapse of Silicon Valley Bank

Transcript

Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode, 405. It’s titled “When Volatility Rises, Financial Things Break.”

What is Volatility and How Is It Measured

Volatility measures how much a security or asset class deviates from its average. That could be the average price, or it could be the average return over time. A stock or an ETF is more volatile if it experiences greater swings in price. 

A stock or an ETF or an asset class is more volatile if its daily, monthly, or annual return deviates significantly from its average, it could be a very high return or could be negative return, but it’s a measure of volatility. And in finance, the statistical measure used most frequently to measure volatility is standard deviation.

Standard deviation is the foundation of modern portfolio theory. If you’ve ever had a financial plan, or an asset allocation plan prepared for you by a financial advisor, or even using some type of online planning tool, oftentimes they’ll show what’s known as an efficient frontier. And they’ll show different portfolio mixes that maximize the expected level of return for a given level of volatility, and that volatility used is the standard deviation.

In a recent editorial in the Financial Times, Eric Lonergan, who is a portfolio manager and author, wrote: “The biggest structural change in investor behavior in the last 30 years is the near-universal adoption of volatility as a measure of risk.” When I read that editorial, I was somewhat—well, I was curious about what he meant and started researching more, because I know as I’ve done asset allocation studies over the years, volatility was just what we used. 

How Volatility Use Has Changed

And as I did additional research, I found a paper from October 2017, published by Artemis Capital Management. I believe the principal author of the paper is Chris Cole, who is the founder of Artemis, and they’re a firm that specializes in volatility. 

The paper said: “What we think we know about volatility is all wrong. Modern Portfolio Theory conceives volatility as an external measure of the intrinsic risk of an asset. This is a highly flawed concept, widely taught in MBA and financial engineering programs.” I certainly learned it in my MBA in undergrad. Those programs, and typically, our understanding of volatility, as they describe, is an exogenous measure of risk. But Cole points out that volatility actually influences risk itself.

The paper continues: “Portfolio theory, including modern portfolio theory, evaluates volatility the same way a sports commentator sees hits, strikeouts or shots on goal—namely, a statistic measuring the past outcome of a game to keep score, but existing externally from the game. The problem is volatility isn’t just keeping score, but it’s massively affecting the outcome of the game itself in real-time.”

As a Money For the Rest of Us Plus member, you are able to listen to the podcast in an ad-free format and have access to the written transcript for each week’s episode. For listeners with hearing or other impairments that would like access to transcripts please send an email to [email protected] Learn More About Plus Membership »

Ready to get serious about your investing?

Access professional-grade portfolio tools, training, and a community to help you stay on track, tune out the noise, and grow your wealth with confidence.

Learn How

Filed Under: Podcast Tagged With: liability-driven investment, pensions, United Kingdom, volatility

J. David Stein
Darby Creek Advisors LLC
P.O. Box 68544 • Tucson, AZ • 85737

Copyright © 2023 • Disclosures, Privacy Policy, and Cookie Policy • Site by Tempora

Manage Cookie Consent
We use cookies to optimize our website, marketing, and services. We never sell users' data.
Functional Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes. The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.
Manage options Manage services Manage vendors Read more about these purposes
View preferences
{title} {title} {title}
Manage Cookie Consent
We use cookies to optimize our website, marketing, and services. We never sell users' data.
Functional Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes. The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.
Manage options Manage services Manage vendors Read more about these purposes
View preferences
{title} {title} {title}