Different sectors of the market behave in very different ways.
As I explained earlier (see Making it easy to follow the different sectors:the Saltydog ‘groups’), some sectors are very reliable and dependable… and a bit dull. They plod along and nothing much happens. Historically, this means things like cash – the safest, most predictable asset of all - and government bonds from well-established economies. Generally speaking (although not always, especially after the effect of QE on bond markets), your money is safe here, but it’s never going to grow very much.
Then at the other end of the scale are sectors of the market which are very unpredictable. When they go up, they really shoot up. And when they go down, they really drop down. Here we find things like small companies, emerging markets, tech and telecomms, and China. You might make a lot of money in these areas, but you might lose a lot too.
To use a more technical term, we can say that the more predictable, reliable investments have low volatility. They don’t move up and down very much.
And the more unpredictable, ‘excitable’ sectors have high volatility. They move up and down a lot.
This is crucial to our investing, and especially to the Saltydog system.
So I’d now like to show you what different levels of volatility actually look like in the markets, and how this can have a practical, profitable effect on our investing. It will just take four simple charts.