Letters to the editor: Short-term management of volatility is needed

The article “Volatility gives boomers bad case of market jitters” (June 21) raised important issues faced by baby boomers and those nearing retirement, and highlights an important element missing from traditional asset allocation strategies: short-term volatility management.

We have found that many asset allocation strategies are constructed using intermediate- to long-term forecasts of capital market volatility (e.g., three- to 10-year forecasts). In our opinion, the use of such long-term volatility forecasts often leads to more static asset class weights that are insensitive to short-term changes in market volatility.

When market volatility in-creases in the short run, the risk profile of a static asset allocation can increase dramatically. In fact, during past periods of high market volatility, we have witnessed several “conservative” asset allocation strategies exhibit volatility levels consistent with an “aggressive” risk profile.

An investor’s ability and willingness to tolerate risk, however, generally doesn’t change from month to month or even year to year. Hence, we think that investors would benefit from an asset allocation that, by design, delivered a stable risk profile — not one that is “moderate” today and potentially “aggressive” tomorrow.

These periodic and uncomfortable mismatches between investor risk tolerances and their portfolio’s volatility can cause investors to take drastic and often detrimental actions.

We venture to state that financial professionals can help protect against these mismatches and alleviate their clients’ discomfort by managing risk more dynamically. Forecasting near-term volatility can help financial advisers reposition an investor’s asset allocation to maintain a stable risk profile.

Although the techniques used to generate these short-term forecasts can be considerably more complex than calculating volatilities and correlations from monthly historical data, we firmly believe that those who devote the time to develop these short-term models will be more in a position to keep clients more comfortable during changing volatility environments.

James A. Colon

Vice president, portfolio manager and senior quantitative analyst

Nuveen HydePark Group LLC

Chicago

I agree with everything in the editorial “Time to rethink our national housing policy” (June 21) except for the last paragraph.

There is nothing wrong with our nation’s housing policy, Federal Housing Administration or otherwise. The problem is no bank or financial-institution oversight.

When you have presidential administrations that tell all the agency heads to get off people’s backs, you see what happens: The Environmental Protection Agency and the Occupational Safety and Health Administration can’t do anything about coal mine explosions, the Bernard Madoffs of the world thumb their nose at the Securities and Exchange Commission, and banks lose all perspective when lending money. 

The Comptroller of the Currency should insist that if banks want Federal Deposit Insurance Corp. coverage, they won’t be allowed to have these screwball loans in their portfolios.

The recently enacted banking laws will go a long way toward helping our county move away from problems like this.

George M. Parker

Accountant

George Parker & Associates Inc.

Decatur, Ga.

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