High volatility is a headline grabber. The media seldom writes about a ho-hum day in the markets. Skewed headlines create fear in investors who have an exaggerated view of market instability.
Volatility is a measure of how much a stock price fluctuates.
High volatility stocks have wider fluctuations in prices, providing higher potential returns but also higher possibilities of losses. Low volatility stock prices tend to be steadier and more predictable, providing lower potential risk and also lower returns.
Just a few times over the past few decades, market volatility spiked dramatically – Black Monday in 1987, the dot-com bubble burst in 2000, and the 2008 global financial crisis.
But, a longer view of the market puts volatility into perspective. Over 65 years to 2017, the average market volatility was 15 percent. Since 2013, volatility has been below 15 percent.
Should you be concerned about volatility?
Short-term day traders look for volatility. Long term, buy-and-hold investors ‘ride out’ volatility. If you sit tight and hold onto (don’t sell) your stocks during a down market, historical performance shows that you may be rewarded over the long term. Of course, it takes nerves of steel to hold tight during whipsawing markets. That’s when your financial plan, commitment to your financial goals, and a firm belief in the strong fundamentals of a company come into play.
Past performance is no guarantee of future returns, but a look at history can be heartening: from its pre-crisis peak in January 2007 to the rebound in October 2009, the S&P 500 Index lost 57 percent. Since then, the S&P 500 has risen over 200 percent.
A useful measure used to assess the relative volatility of a security is “beta,” which can be found in most online stock profiles. When looking at beta, the market as a whole is considered to have a beta of 1. A stock with a beta above 1 is more volatile than the market, whereas a stock with a beta below 1 is less volatile.
Learn why panic may not be the best reaction to a volatile market here.
Douglas Goldstein, CFP®, investment advisor is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published April 23, 2018.