While market prices are steadily moving higher this year, risk (defined as price volatility) has declined for many multi-asset ETF portfolios. In turn, returns are steady and providing a smooth ride for investors. No wonder so many surveys lately show investors are feeling comfortable. But will this trend continue?
Risk is decreasing for two reasons. First, in absolute risk terms (as defined by price volatility), overall market volatility is dropping. By some measures, it recently reached its lowest levels since the 1960s.
That alone explains why investment firms are seeing inflows and higher asset-retention rates. Volatility is destabilizing for investors and often a catalyst for emotional decision-making. That is the case whether prices are falling (investors are nervous of losing money), or rising (investors fear missing out on gains).