AllianceBernstein quantitative research anaylst Eric Demoiseau said the financial year-end on 30 June 2014 marked two consecutive years of strong performance in Australian shares.
"Instead of breaking open the champagne, however, many investors are nervously wondering what might come next," said Mr Demoiseau.
Cautious investors should consider the volatility index (VIX) as a means of anticipating the stock market’s performance and expectations of volatility over a 30-day period, he said.
“It is essentially a record, in real time, of stock index option prices and is inversely correlated to the underlying stock index,” said Mr Demoiseau.
“[It is] often seen as a ‘fear indicator’ when it’s high and a ‘complacency indicator’ when it’s low.
“A rise in the VIX signals an expectation of higher volatility in the underlying share market – historically, a reasonable indicator that share prices are about to fall,” said Mr Demoiseau.
One solution for investors wanting to take such steps may be to increase their portfolio exposure to low-volatility or low-beta equities, he suggested, adding that a portfolio of low-volatility stocks will tend to outperform high-volatility portfolios on a risk-adjusted basis over time.
“A strategy that combines low-beta and high-quality stocks at reasonable valuations with a focus on absolute returns would be a reasonable option for investors who want to remain exposed to the growth potential of equities but are concerned about the market’s apparent complacency,” he said.
“These types of strategies can be particularly appealing for retirees, for defined benefit schemes and insurers."
